The biggest regret we face from the recent downturn is failing to learn anything as it passes. That is not to say we can avoid another downturn, as surely another bout of greed will come along and create another bubble that will subsequently burst, but perhaps we can at least take away a few ideas that might generate some smarter investment decisions down the road.
A footnote to an article by Dayana Yochim for Yahoo! Finance this month mentions that she regulates herself with a three-day waiting period before making any major money decision. Long a means of gun control and a common rule to waiting to call for a second date, there is no doubt this cooling off period could also be a great tool in governing personal finance on several fronts.
The first is making knee jerk reactions in our portfolios. So many stories are starting to be told about those who finally reached their boiling points right as the market seems to have hit its trough back in March and sold a significant chunk of their equities at the lowest of their lows. While three days might not have saved everyone, certainly taking a breather and realizing this downturn’s place among a lifetime of investing ups and downs might have provided some additional reflection, and an opportunity to avoid selling out right before a historic upswing.
This helps on the upside as well. Greed is a powerful force in convincing investors to stay overweight or even buy more of a certain asset class when things are soaring and can’t possibly go down. If instead, that investor takes a few days to really think about times such as these, they might instead decide to take the respectable profits they have already achieved and buy into that lesser producing asset classes that, while not exciting anyone at the moment, are sure to impress down the road and keep the investor true to their original plan.
Lastly, just think what this waiting period could do for budgets. My wife and I were joking over the weekend that it seems all too easy for a quick trip to Costco for some paper towels and baby wipes to turn into a several hundred dollar shopping spree. By picking a certain dollar amount above which you will wait three days before making the final decision to buy, think of how many wasted purchases could be avoided.
A running theme in some of my past posts is that sometimes the best lessons are not those that induce sweeping reform or dramatic differences in outlook on how we do things. Major changes are rarely sustainable over time. It is instead those lessons that result in small, balanced tweaks to our behavior that can truly have the most impact over time. Don’t agree with me? Take a deep breath, wait, and then decide.
By Chip Workman