The Wall Street Journal recently published an article about four questions on the top of investors’ minds. They were (i) Will the market rally broaden? (ii) Will stocks go up once Fed starts cutting rates? (iii) Will there be a recession? (iv) Will 2024 be a good year to buy a home?
Not surprisingly, the four questions they identified as top of mind are unknowable and unpredictable. This is the crux. Almost all questions and concerns that harrow investors’ minds don’t have an answer. We can opine and prognosticate all we want (as market pundits do), but all that will do is feed the illusion of certainty.
There is no point worrying about things that don’t have a definite answer. It is best that investors ask themselves more productive questions – questions that have answers that are knowable and in their control.
4 Better Questions for Investors
How much downside am I willing to tolerate – both financially and psychologically? This question is often known as a risk question, but I see it more as a fluctuation question. Throughout the history of the stock market, as an index, there has never been a permanent loss. There have been many temporary losses, but those only become permanent when investors choose to sell. Therefore, what we want to know is how much fluctuation an investor can tolerate in the short term.
How confident am I in my plan/strategy? This is huge! Many investors have a plan/strategy – whether constructed on their own or with the help of their advisor. But many investors lack conviction in the plan as evidenced by their wanting to switch strategies when the proposed plan/strategy temporarily falls out of favor. If investors aren’t that confident, if they don’t really understand how their plan will help them despite the pullbacks, then it is important they get confident in it. That may require a change in the plan/strategy, but more often than not, is just about talking through the strategy and when it will work and times when it won’t appear to be working (but that it is OK).
What is the purpose of the financial media? It is no secret that the noise the financial media spews significantly influences investors’ thoughts, perceptions, and actions. It would be unrealistic to expect investors to ignore all financial media, so best to help them have the right perception. If investors recognize and remember that the financial media exists not to help them make good decisions, but to get them to tune in and click, then we can minimize the influence of the noise. That is why the media sensationalizes everything – they need it to support ad revenue. There is no incentive for the media to provide correct advice “don’t worry about what the market did today,” the incentive is to get people to tune in.
What is my decision-making process? When investors have thoughts about a change in their strategy or get tempted to invest in what is hot (or safe) at the time, how do they decide what to do? The default is to follow the emotional impulse, as many do. If there is no specific decision-making process then we can expect emotions and mental shortcuts to rule our decisions. When investors recognize they don’t have one, it is a very worthwhile activity to sit down and help them create one. They will thank you and themselves later on.