The Fix The Investments Series
Volatile markets offer the perfect opportunity to reflect on your personal approach to investing and wealth building.
October 2018 showcased the uneasiness than can develop in financial markets because of fundamental pressures (interest rates, earnings reports, etc.) and non-stop, hyper-stylized political porn (no definition required, one week ahead of the 2018 midterms!).
When bubbles develop, as they often do, investors enter a new phase, behaving like the tulip bulb speculators of 17th century Holland, who learned that all manias inevitably surrender to market realities. That is to say, all bubbles will eventually burst, and in a more general, normal way, all trends are bound to reverse.
Corrections are inevitable. They’re healthy, necessary and unavoidable, but that doesn’t prevent people from panicking as prices fall. Corrections occur when the markets (you and me) decide the mania should end, and the overvaluation we placed on assets need to fall back to prices that are closer to their real value.
People are not top-down or bottom up, not large-cap or small-cap, and they’re not sector-rotating or momentum-driven creatures. We are not the sum of our adopted investment approaches; we are flawed humans with many fears and biases that manifest in our portfolios. Psychologist Abraham Maslow tells us that we are motivated only by the ultimate satisfaction of our deepest personal needs, which often requires us to build safeguards against ourselves (the inner enemy)!
Psychologist Abraham Maslow tells us that we are motivated only by the ultimate satisfaction of our deepest personal needs, which often requires us to build safeguards against ourselves (the inner enemy)!
We are now a few decades into the age of immediate access to information, and when combined with the innate human desire for instant gratification, investment decisions tend to become random and impulsive, and then acted upon instantaneously.
Knowing this, the objective of every investor should be to first become an emotionally intelligent investor, and then build intelligent portfolios that will perform throughout all markets, changing cycles, reversing trends and bursting bubbles.
“Becoming an Intelligent Investor,” means identifying, understanding and modifying your worst investing habits that are driven by our inherent human behavior.
“Building Intelligent Portfolios,” means employing strategic, passive approaches to build a lifetime financial plan.