In Uncertain Markets, Beware of the Herd

It's fascinating how the behavior of the market reflects the makeup of its participants—not just our enterprising nature but also our behavioral foibles, such as a herd mentality.

Take the recent market environment. On July 31, a run of trades seemed to beget a larger run of trades, culminating in a 2% drop in the S&P 500 index—enough to wipe out all of July's gains. Traders told the Wall Street Journal they saw "no single catalyst for the stumble."

That's another way of saying, "Who knows what caused the panic?" The global news hadn't really changed all that much. All of the social, political and economic promises and threats that existed on July 30 remained about the same on July 31. No one reported an asteroid crash. So why did the market, in its collective wisdom, stage such a significant decline?

Just as no one really knows what caused the July 31 market drop, no one can predict what's to come next week or next month or next year. But know that whatever short-term events may unfold, the fundamentals of our recommended strategy for your investments remain the same.

Market risk is a fact of life, and the market's periodic ups and downs are something we can't control. But market risk is deliberately built into your portfolio because with it comes the potential for reward. This is why, as tempting as it may be to follow the herd by trading on bad (or good) news, we must stay the course. Consider that:

  1. By the time you're aware of good or bad news, the rest of the market knows it too, and already has incorporated it into existing prices.
  2. It's unexpected news that alters future pricing, and by definition, the unexpected is impossible to predict.
  3. Any trades, whether they work or not, cost real money.

Rather than try to play an expensive game based on information over which we have little control, we continue to recommend that you focus on what can be controlled:

  1. Minimizing costs.
  2. Forming an investment plan to guide you to your goals—and sticking with that plan.
  3. Positioning your investments to participate in long-term market growth.
  4. Maintaining diversified holdings to dampen market risks.

Our clients have heard this message before, but it bears repeating whenever the market is roiled by emotion: Stick with your long-range investment approach—or, if your personal goals have changed, work with us to thoughtfully adjust your approach. As always, if you'd like to review your investments, please don't hesitate to contact us.