The “Greek drama” is over – or at least at an intermission. But for investors, the dire headlines generated by the country’s financial crisis provided a stiff test of self-discipline.
First, a recap: Earlier this week, Greece and its Eurozone creditors tentatively agreed on a last-minute bailout package that could stave off economic collapse in the debt-plagued country of 11 million.
Stock markets around the world rallied after the news ‒ but just days earlier, the Dow Jones Industrial Average plunged 350 points on fears that Greece would crash out of the euro and send shockwaves through Europe.
That’s the kind of market volatility that can scare investors to the sidelines. And you can be sure that plenty of investors did indeed exit the market during the days and weeks that the drama unfolded.
That’s why Greece was a test. As we’ve written before, the key to investing success is to buy good companies and hold them for a long time. But investors are human, and we humans are hard-wired to herd together and flee from trouble.
Our emotional wiring leads us to make behavioral mistakes in our investing. The big daddy of emotion-driven mistakes is jumping in and out of the market based on fear and greed. Letting headline news drive your investment process and investing behavior is a recipe for confusion and mistakes because future news events are unpredictable and no one can consistently guess how markets will rise or fall in response. Too often, headline-driven investors end up selling low and buying high, losing money unnecessarily and moving themselves further away from their goals and objectives.
Such behavioral mistakes help explain the “performance gap” between the returns markets offer and those achieved by the average investor. As we noted back in June, the average investor underperformed the average mutual fund by 2.49% over the 10 years through 2013, according to Morningstar.
The Greek crisis, then, was a test. For those with diversified, long-term portfolios, the way to pass was simple: Do nothing. Indeed, through the countless market “crises” over the years, history shows that the safest, most profitable thing to do is usually to stay on a well-mapped course.
Remember, the key to building wealth for the long term is time in the market ‒ not timing the market.
Granted, staying calm is not always easy. The modern, wired world is filled with emotional triggers that lead investors off of the straight and narrow. And no trigger is more potent than the headlines predicting disaster.
The trick is to focus on long-term goals and strategy rather than short-term headlines. And that’s where documenting your investment process and guidelines helps. Referring to a document that provides a clear investment philosophy and process over full market cycles, not fleeting crises, helps keep you from making knee-jerk reactions that you’ll later find to be regrettable.
You can be sure that the latest Greek drama won’t be the last time that headlines roil the markets. Rising U.S. interest rates, China’s slowing economy, even another crisis in Greece ‒ any and all of these could be catalysts for fear-based selling in the coming months. But the wisest reaction will not be to race for the exits. If you would like help developing a long-term investment process and support to help you remain focused on your long-term goals, we may be able to help. At Intelligent Capitalworks, that’s just part of what we do.