In this year’s Preakness, Bodexpress bucked his jockey off and scampered around the track sans rider. Even after the race ended Bodexpress galloped over the grounds because that’s what racehorses do. The race came to mind when a headline popped up in my Twitter feed, “Focus like a racehorse.” Sure, we should keep our minds concentrated on our goals and not let distractions bother us, but that’s not what humans do. People often claim to be long-term investors, but statistics show many “panic sell” when markets drop. It’s normal; people react emotionally to certain stimuli. Neurons subconsciously fire in our nervous system. We can’t help it; evolution wired us that way.
As I type this column, the Dow Jones Industrial Average (DJIA) is down over 300 points. While quite shocking, it is less than a 2 percent decline at today’s prices. According to Dow Jones Market Data over the last 120 years, the DJIA has dropped 2 percent in a single day more than 1,000, roughly once every 33 trading days. Assuming past is prologue we should expect a 500 point decline every two months. We can debate whether the DJIA is an appropriate measure for today’s market, what Shakespeare meant by the past is prologue or what causes stock market volatility. What is not for debate is the importance of keeping negative numbers in perspective.
Dr. Robert Shiller shared the 2013 Noble Prize in Economics for his analysis of human behavior regarding asset prices. He found sharp price declines sear in the minds of professional and individual investors alike. In March of 2009, over 80 percent of institutional and individual investors expected another stock market crash in the next six months, for the record stocks were up over 25 percent in 2009. It’s evolution; we can’t avoid it. Shiller points out if a caveman saw a tiger mauling someone down a path, they likely avoided that path in the future even if the tiger was not there. Conversely, a trail with tasty fruit like apples or blueberries, Shiller noted, “will stick in your mind, but it’s not as important to your survival, so it’s not as memorable.” Like our forebears, bad news stings more than positive news feels good.
Our 24-hour business news loop and instant online access impede our ability to make appropriate decisions, too. In the '70s, John Prine scolded us to blow up our TVs. When you listen to Prine’s “Spanish Pipedream," do the 21st-century update and envision smartphones. Jimmy Buffett said it best; we are cavemen in blue jeans. Competent financial planning professionals help their clients incorporate an investment strategy with discipline.
National Public Radio just announced the DJIA was down over 400 points. While not pleasant, sharp selloffs come with the territory. If market volatility is upsetting, you are fishing with the wrong bait.
You can’t always get what you want but Buz Livingston, CFP can help you figure out what you need. For specific advice, visit livingstonfinancial.net or drop by 2050 West County Highway 30A, M1 Suite 230.