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Maintaining Reasonable Expectations In a Volatile Market

Maintaining Reasonable Expectations In a Volatile Market

| October 27, 2018

One of the most well-known investors of the 20th Century, Benjamin Graham, said that “the investor’s chief problem—and even his worst enemy—is likely to be himself.”1

Market turmoil can test the fortitude investors need to sustain a proven long term investment strategy. In my experience, emotional reactions are more of a threat to investment performance than market corrections themselves. We know from credible long standing behavioral studies that investors will typically sacrifice about 3% a year to emotional management errors.2-5  There are a myriad of psychological terms for these foibles, but lets suffice to say that most are avoided, or at least mitigated, when investors rely upon professional investment advice.  With this said, I want to offer a bit of timely advice for those who might be feeling anxious about the markets.  

  1. Ignore the financial media.  Today's mainstream media has one overriding purpose: to entertain the reader, listener, and viewer between advertisements.  By "entertain" I mean the intentional manipulation of emotions to induce greed and fear, and there is no better way to do this than through the use of half-truths wrapped in titillating soundbites. The mainstream media can't provide individual investment advice, and if you are plugged into their talking heads then you are feeding the emotional instability that often leads away from prudent stewardship. Professional investment advisors ignore the financial media because it amounts to useless noise. Bottom line... you wouldn't want your investment advisor relying upon entertainment media and neither should you. 
  2. Don't anchor your expectations to major market indexes.  It's hard to ignore the attention given to the Dow Jones Industrial average and Standard and Poor's 500 indexes. Our culture has been programed to associate these indexes with "the market", but they may not have a correlation to a well-diversified personal investment strategy.  While the Dow and S&P 500 have become a popular measure of the "market" they are really only benchmarks for a small number of large company stocks, and "large cap" stocks typically represent a minor portion of a diversified investment strategy. So while it is appropriate to compare the large cap positions in your portfolio to these indexes, it is not appropriate to compare these indexes to positions in small and mid sized companies, fixed income, international or emerging markets, investments, real estate, precious metals, etc. Each asset class in an investment portfolio should be compared to relevant indexes, and your overall strategy should be compared to an appropriate risk-adjusted benchmark.  
  3. Maintain communication with your financial adviser. When you feel anxious about the markets the first thing you should do is contact your financial adviser to reassess your risk tolerance and affirm that your investment strategy is prudent.  If your concerns are warranted then review your investment policy to determine whether to modify your strategy.  

The takeaway here is that emotional decisions often lead to expensive mistakes, and in this information age it's never been easier to become your own worst enemy.  If you are feeling anxious about market then contact me to discuss your investment strategy. We will affirm your tolerance for market volatility and confirm that your strategy is prudent.  

More information:


  1., 2017
  2. Vanguard money market funds Vanguard research September 2016 Putting a value on your value: Quantifying Vanguard Advisor’s Alpha®. 
  3. 2014 DALBAR QAIB Highlights: Futility of Investor Education Bad Decisions Persist After Decades of Education and Disclosures
  4. Help in Defined Contribution Plans: 2006 through 2012, Aeon-Hewitt, May 2014
  5. Advice seekers retire with 79% more money, Wall Street Journal, Market Watch May 22, 2014