3 Questions Every Confident Investor Should Ask
So this bull market is now nearly 11 years old. It started in March of 2009, and apart from a couple of corrections, it hasn’t strayed too far off of its upward course.
That’s great, isn’t it?
Well, yes and no. On the one hand, if you’ve stayed in the market the entire time, it’s been pretty good for your overall rate of return. On the other hand, markets like these tend to bring out the worst in investor behavior.
When stocks are up for extended periods of time, people often think it’ll go on forever. Likewise, when they’re down in bear market territory, people tend to believe the same thing. This can cause them to make irrational decisions based purely on where they’re guessing the market will be sometime in the future.
This bull market for the S&P 500 may have you thinking that it’s time to “raise the stakes” and increase your allocation to equities for fear of missing out on any potential future returns. But before you decide to do that, it’s important to consider three questions.
First, if you make this investment and it works out the way you think it will, how will your life be different? Think about it. What we typically discover is that people will admit that even if everything works exactly as well as they’d hoped, they would only see, at best, marginal improvement in their current situation. In other words, they find they’re taking a risk without much of a personal reward.
Second question to ask yourself: If you make this decision and you’re wrong about how you think it’ll turn out, how would your life change? In this instance, if the outcome turns out badly, people often see the consequences being much, much worse: they see a big chunk of their portfolio gone, with no chance to recover in time. In severe cases, they could face bankruptcy, divorce, constant anxiety, any number of things.
Third question: Have there ever been times in your life where you were absolutely certain of a particular outcome, but then it didn’t work out as planned? I would imagine so. When you think about it in those terms, about any of your failed past predictions, you might come to realize that while a positive outcome would be nice, there is the very real risk that it won’t happen the way you think, and you’ll wind up with serious, possibly devastating results.
The point here is that hasty investment decisions that stray from your long-term strategy are, more often than not, a bad idea. Whether it’s out of “raging bull” overconfidence or market fears during a downturn, volatile markets can cause even the savviest investor to do the wrong thing. This is why having a strategy, along with an advisor who aims to keep you rational, may very well be the best thing you can do.
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