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Whether you are happy with the election results or not, the fact remains we have a new President, new administration and a new agenda. Ready or not, here it comes. More importantly the election reminded investors to trust their discipline over their intuition. Fear and greed move the market more than earnings ever will and if you allow your emotions to rule your decisions, you will pay the inevitable price.
At 11:15 p.m. Tuesday night the Dow Jones futures were down more than 800 points. Markets only go down when people sell. Trust me; people selling across the globe were caught up in personal emotion rather than by financial facts. By noon Wednesday, – a mere 12 hours later – the Dow reversed course and moved over 1,000 points up from its earlier low. The move rivaled the May 6, 2014 flash crash and the August 24, 2015 Dow decline of 1,000, presumably prompted by China devaluing its currency. In each and every case, the emotional response cost investors’ money.
Risk tolerance is not one of my favorite discussions, but it is necessary when it comes to investing. When you meet with your advisor – which in many cases is yourself – you must ask how much volatility you can accept before your emotions take over. When emotions intervene, you capitulate by selling what you own. Knowing an investor’s tolerance level is what let's people like myself do our jobs. It also lets investors accept bumps in the road in stride.
If you know that your limit to volatility is a 20% move to the downside, it is imperative that your advisor understand that and build in precautions to prevent sudden statement shock. If volatility isn't an issue for you, your advisor needs to know that as well.
Secondly, please know your biases. In 2003, George Bush made a very important tax change to dividend income. People disliked him so much that they missed the change and an opportunity to participate in the markets in an extremely positive direction. Others disliked President Obama so much that they missed the Federal Reserve’s action that drove the equity market to new highs.
Today, we have a Trump election that clearly irritates many individuals. But that bias or extreme dislike may cause individuals to lose sight of the fact that year-over-year earnings for the S&P 500 have turned positive. In fact, when energy stocks are pulled out, earnings are actually up a robust 7.5%. People might also forget that the U.S. labor pool grew and the unemployment rate has dipped to 4.9% and wage growth is up by 2.8%, the highest since 2009.
The point is simple, my friends. Emotions and biases are real. I have them and you have them, but to survive in the investment world you better know what your emotions and biases are. If you jumped out of the market because of the election, consider the tolerance you have for risk and make amends. Your retirement account deserves respect not emotional swings.
Tax advice provided by CPAs affiliated with Financial Enhancement Group, LLC. Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column offset=”vc_hidden-lg vc_hidden-md vc_hidden-sm”][vc_widget_sidebar sidebar_id=”sidebar-main”][/vc_column][/vc_row]