When Good Markets Go Bad

By Takara Alexis

The markets have nearly rebounded to the historic highs reached in 2000, but investors haven’t forgotten the emotional devastation of the tech bubble burst and its aftermath. History shows us the markets will cycle down again eventually; we just don’t know precisely when. When that downturn comes, a financial plan, an investment strategy (how you get to the big picture) and a trusted financial counselor could make the difference between staying the course and bailing out too soon.

Researchers have found that the human brain wants to be happy and will in fact bend our perceptions of reality to that end. Faced with evidence that we have made a mistake in judgment, our brain denies, rationalizes, blames and defends, because admitting mistakes damages our self esteem and causes us to be unhappy.

Faced with investment decisions, our brain seeks for ways to support its chase for happiness. We stuff ourselves with information – from the media, from the stock ticker, from cocktail party conversations – and take on a sense of achievement that we have superior knowledge. We do not. We have a surplus of information.

That false sense of knowledge causes us to make an investment based on performance from the past – despite prospectus disclaimers warning us that past performance doesn’t promise future gain. We buy what’s popular – because our brain tells us that many people can’t be wrong. We resist selling investments when performance indicates we should – because we do not want to admit we were wrong. And we invest in stocks just because we know the name or, worse yet, because we work for the company.

If you’ve fallen pray to these financial defects in the past, now is the time to examine your financial strategy. That starts with a financial professional you can trust to be the voice of reason when you start to freak out about your portfolio. That trusted advisor should be assisting you develop a financial plan that starts with determining your life goals, not just a target amount for your investments. Be upfront when it comes to your assets, your liabilities, your hopes and your fears so your advisor gets a comprehensive picture of what you wish to accomplish.

To execute your plan, you should have an investment strategy that fits your time frame, money needs and risk tolerance. With your financial professional, chose which investment vehicles are most sufficient to your profile. That constitutes understanding what criteria or scenario should set you up to sell an investment, hold it or buy more.

When the inevitable occurs, and the markets retreat, do not look to the media, your friends or even the major indexes for your next move. Look to the financial plan and investment strategy you and your financial professional developed and evaluate if those should change in the current climate. Good markets will always, eventually, go bad. With careful planning and professional financial counsel, that doesn’t have to be the case with your portfolio.

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