Whenever we undertake any activity, it is a wise practice to identify risks involved. That means we want to understand what the risks are, where they come from and what (if anything) we can do to lessen the risk or hedge against it. Investing is no different.
The problem is we are focusing on the wrong “risks”. We think the risk is about what’s happening in the economy. We worry about if companies are laying off workers, does that mean more risk to our investments? We wonder what the FED is going to do and the risk of that policy. We imagine what will happen if taxes go up or down (public policy issues) and the effect on our investments. The biggest risk in investing is none of the above. Besides, we can’t predict or control these things anyway.
The biggest risk in investing is …the behavior of market participants. In other words, the behavior of “investors” in response to layoffs, recession, and the like.
A recession, or layoffs, or the FED raising (or lowering) interest rates, changes in public policy alone don’t cause the market to go up and down. It is our collective response to that information that causes the market to move one direction or another. Our responses – our emotions and perception of the risks out there – can even cause bubbles and bear markets.
Often times our assessment of the information we receive is wrong. That’s why we may feel more comfortable to buy in after the market has gone up or sell after it’s gone down. We perceive less risk after a gain – thank you dopamine. Or we perceive a lot of risk going forward after losses thanks to the amygdala.
Be careful what information you expose yourself to. Nearly everyone in the financial media is trying to predict things like a recession or what the FED or the market will do. The media makes prediction and uses scary headlines to get “clicks – not to share good information. We can’t control the media, the information, or the FED, nor can we predict what will happen next. We can control our exposure to the media and our reactions. That is why it is best to ignore that noise and let us help you understand the information “out there” and apply it to your financial plan and goals.
If you’d like to talk more, reach out to Joan or Will.