Halloween has arrived early! You would think this if the recent stock market action was any indication of such.
It is entirely normal to have a reaction to yesterday's stock market drop - probably a very, very strong reaction. It is human nature. We are wired to do so. There really is nothing you can do about preventing that reaction. I can tell you though, what you are experiencing has everything to do with feelings and nothing to do with thinking.
If you have ever taken a course in Psychology, you probably learned about the Fight-or-Flight Response. The term "fight-or-flight" represents the choices that our ancient ancestors had when faced with an imminent danger in their environment. They could either stay and fight or run away. In either case, the physiological and psychological response to this stress prepares the body to react to the danger. So why does a bad day in the stock market trigger a stone-aged response in our bodies. As I said before, it is just the way that we are wired. It is an automatic response and there is nothing that we can do to prevent it from happening.
Enough about feelings. Let's do some thinking. If we zoom out a little and take a look at what is really going on we note the following two facts: U.S. corporate earnings are surging, and the U.S. economy as a whole is also surging.
There is also much noise out there to trying to throw you off of your game. For example, this Fortune Magazine cover from a couple of months ago:
The article makes for a catchy cover story, and certainly entices people to buy the magazine. But it has the potential to seriously scare and mislead investors. Why? Because, as the author himself says, nobody, including most notably economists, has been able to accurately predict economic and market downturns. So, time and time again, market “timers” have gotten burned.
My view is that the strength in U.S. stocks can continue until the Federal Reserve makes a deliberate move to slow the economy. From every indication we have from the Fed, that is still a ways off. As you know, I do not care for predictions. I am a strong believer in "What is, is." And what is right now, is the fact that despite recent volatility, U.S. stocks continue to remain the strongest asset class of the six that I follow on a daily basis. Not cash. Not bonds. Not commodities. It is U.S. stocks. I remain vigilant every day for changes that are truly long-term in nature and will adjust our portfolios accordingly.
Investment success comes from ignoring the short-term noise and following a plan. Emotions can and will wreak havoc on your portfolio. I know that it is tough to do, but try to ignore the short-term market fluctuations that will severely tempt you to abandon your plan. There will be bad days for sure. Fight the urge to react to your feelings. Think instead. The prudent and best way to maximize long-term wealth-building is to stay fully-invested in a broadly diversified portfolio.