What has happened so far in the markets this year: 2020 began with the coronavirus.
In early January, no one yet knew how contagious it was or how deadly it might become.
Markets didn't seem concerned, reaching new highs by mid-February.
When the first United States death from the virus was reported later that month, markets took a hit. They stabilised briefly in early March, then staged the biggest and fastest rout in history, as virus cases soared and it became clear the economy was going to shut down.
That kind of market collapse is a strong indicator of one thing: irrational, fear-driven panic selling. Many did so with little thought and no plan about how to proceed if things got better or worse.
It's understandable that there's plenty of seller's remorse. What should you do if you were one of those folks who dumped a lot or even everything?
1. Recognise what happened
What motivated you to sell? Was it something you heard on the news? An emotional impulse? Did you give any thought to how selling fit into your broader investment strategy? Or was it merely an itch that had to be scratched?
Figuring out what goes into your own decision-making is the key to reducing mistakes.
Analyse your process: Determine what factors should have an impact when making buy and sell decisions.
Then, face up to what actually drives those decisions. If there is a mismatch between those two, recognise it and make adjustments.
If you don't know how you got lost, what is to stop you from getting lost the next time this happens? Remember, there always is a next time.
2. Take ownership of the situation
Too often, it's easy to blame others - your broker, the Federal Reserve, the media or your brother-in-law's awful tips - when we find ourselves in uncomfortable circumstances. This will not help you in the least. Instead, take ownership of the situation that you created through your trades.
First, admit your error. Second, acknowledge that it wasn't part of your carefully created financial plan - you do have a financial plan, right?
Second, try to understand that this is probably more than just a single decision; it's part of a general pattern of behaviour.
Last, understand it is not only you; almost everyone either has or will make these exact same mistakes.
3. Always have a Plan B
Your investment allocation - the percentage of stocks, bonds, real estate and cash you hold - is your strategy. Tactics are how you execute that strategy. This means that every position or trade should have a measure to determine if it's succeeding or failing as part of that strategy.
Typically, the determinant is price (but it could also be time). Never make a change in your portfolio, especially in equities, without having a well-defined metric to confirm if your decision was right or wrong.
Consider this fictitious example: I sold my S&P 500 holdings in March at 2,500 because I believed markets might get cut in half. I will repurchase it at 1,500 if that turns out I was right, or buy it back once it returns to my 2,500 sell level, in which case I will have been wrong. That's a rational way to deal with a portfolio change, no matter what happens.
4. Undo the trade
Reverse whatever it was you did. Chalk up the cost of the error to tuition in the University of Mr Market.
Then you have a couple of options when you reinvest. You could get back in over several months' time in equal instalments, or all at once. The latter probably is the smarter move, and studies have found that 68 per cent of the time, you are better off doing it in a lump sum.
5. Discipline is almost everything
The best plans are meaningless if you lack the temperament or self-awareness to stick with them.
Managing your own portfolio is hard because your money is so wrapped up in your emotions. Keeping your feelings in check is challenging in the best of times; when the news has been nothing short of horrifying, it's even harder.
Of course, all of us have irrational emotions and reactions to events. The solution is to either become disciplined at controlling your behaviour or hire someone to do it for you.
All of this advice above is much easier said than done. It is almost impossible to foresee your own state of mind at some uncertain point in the future. But if you make a plan, it is easier to manage yourself when the volatility arrives. And remember this: The wild swings in markets, the bad news, the gut-churning sense that everything is out of control will come back at some future point. They always do.
BLOOMBERG
- The writer is chairman and chief investment officer of Ritholtz Wealth Management.
