As an investor, it’s important to ask the right kind of questions. Especially during periods of markets in stress, forget the “where and when” questions and try to focus on those that begin with “what and why.”
Over the span of four successive days from last Wednesday through Monday, the US stock market dropped 1%, 2%, 3% and 4%. The total decline was fast and furious and resulted in a long-awaited 11% drop.
It’s about time. I’ve been expecting this. You should expect more ups and downs along the way. If this quick drop has left you a bit shocked, there is always time to reevaluate your overall risk in your portfolio.
I’ve personally seen a number of people who are far too invested in the stock market. When I pointed it out, they largely appeared unaware. I suspect it was due to a lack of asking the right type of questions.
At times like these, the questions I get most begin with where and when. They also tend to be formed by fear and greed and often focused on fortune telling.
Where is the market headed? When is the selling going to stop? Where is the bottom in oil? When is China’s government going to stop the contagion? Where’s the Fed now?
The reality is most investors – including professional advisors – don’t know much about where markets will be tomorrow, next week, next month or even next year. Honestly, many don’t have a clue about much at all.
While questions of when and where tend to lead to emotion-based decisions, I’ve found the best action-leading questions start with the words what and why. These are the questions that tend to drive deeper thoughts and fact-based decisions.
What’s trading at bargain levels now? Why not own more energy stocks after such huge declines? What dividend does this company pay based on today’s stock price? Why not sell that stock with it now priced for such good news? What’s management going do with that huge pile of cash? Why shouldn’t I buy more with it down over 20%? What level of exposure to China does this company really have?
Over the years, my view is, people have distanced themselves from an understanding of the investments in their portfolios. I cannot entirely blame them for this. The cloud of complexity can get pretty thick in the financial industry. The cynic in me wonders if the pile of acronyms and flurry of buzzwords are secretly designed to intimidate the public.
In moments like these, my advice is to take note of the types of questions you’re asking yourself and others. What exactly do you have to lose by doing that?
