1. Hindsight. During a selling onslaught, it’s always tempting to play the “I knew I should have sold/ taken less risk/hedged my portfolio” game. Markets always look easier in the rearview mirror but this kind of thinking tends to be a waste of time if it exists outside of your typical investment plan or behavior.
2. Your copy of Thinking, Fast and Slow. Kahneman quotes are amazing and all but completely useless for investors during a correction. I loved this book but even he says all of the studying he did on human behavior hasn’t changed his own behavior. Kahneman once said, “I’ve been studying that stuff for over 50 years and I don’t think that my intuitions have really significantly improved.”
3. Looking at the stocks your favorite legendary investor holds. You have next to nothing in common with your favorite investing billionaire. The stocks or hedges they hold have nothing to do with your risk profile, time horizon or resources.
4. Trend lines on a chart. I would like to apologize to my technical analyst friends but…
Stocks don’t care about trendlines when they’re falling hard and fast.
5. P/E ratios. If markets have all but ignored P/E ratios as stocks have risen, they’re not going to start mattering all of the sudden as stocks fall.
6. When someone tells you to, “Ignore the noise.” Ignoring the noise is all but impossible at this point. We’re all too plugged in with alerts, social media, email, and the 24-hour news cycle. There is no such thing as ignoring anymore, only filtering.
7. News headlines. If it’s on the news the market has already priced it in or moved on because it didn’t matter enough to elicit a reaction.
8. Advice from someone who doesn’t understand your personal circumstances or goals. This includes me.
9. Motivational quotes. Sorry but Sun Tzu or Marcus Aurelius aren’t going to be there to hold your hand when stocks are falling.
10. Tactics. Hedging, buying the dips, selling the rips, getting defensive, or waiting for the fat pitch all sound like wonderful moves during a correction depending on your stance at the moment. But these tactics are worthless if you only practice them on the fly, outside of a well-thought-out investment plan.
11. Backtests. Backtesting investment strategies can be helpful from an expectations-setting perspective but spreadsheets have more willpower to stick with a strategy than any human being. You can’t simulate losing money. And in the backtest you always know when the downturn is going to end. Not so in a front-test.
12. What other investors are doing with their portfolios. One of the biggest mistakes you can make as an investor is confusing your time horizon or risk profile with someone else’s. How other people invest shouldn’t concern you because no two people operate their portfolios under the same set of circumstances. And even if this was the case, your personality can alter your ability to take risk in comparison to others.
Your best bet as an investor is outperforming your lesser self, not other people’s portfolios.
In a future installment, I’ll do a follow-up of the things that DO help during a market correction.