One night last weekend, I was in bed reading when I was distracted by a noise coming from the bookcase in my master bedroom. I heard a thump and then scratching. Convinced it was one of my pets messing with my suitcase, which was out and packed for a trip the next day, I ignored the sounds. Thump, scratch. Thump, scratch. Thump, scratch. Finally I sat up in bed to admonish my cat for being a pest, however I quickly noted that said cat was on the other side of the room. And he was staring intently at the bookcase.
When I got up to look more closely at the bookcase, the door actually opened a little bit. The thump of it shutting was followed immediately by scratching noises. I stared at the door. Thump, scratch. I wondered if I should open it and see what was in there. Thump, scratch. I was pretty convinced it was an animal. Thump, scratch. A squirrel perhaps. Thump, scratch. Maybe even a honey badger.
Whatever it was, I was sure it had rabies.
I called the wildlife removal company and asked if they could come in the morning. They assured me that they would be at my house at 8:00 am, and I went to bed downstairs – after taping the doors shut and barricading the rabid honey badger in the cabinet with an ottoman.
The wildlife people came to my house after I left for the airport, but called me to report on their findings before my flight took off.
“Ma’am, we’ve contained the situation,” they said.
“Was it a honey badger?” I asked.
“No, ma’am. Your DVD player turned on and was trying to open, which bumped the door. Then it spun and scratched the door, before shutting and trying to open again.”
Yes, the wild animal in my house was a vicious DVD player.
Why am I telling you this pretty humorous but somewhat embarrassing story? Because every person to whom I’ve told the story in person asked me the same question: “Why didn’t you open the cabinet door and look?” My answer? At the end of the day, I knew I had two long-term solutions to the problem. Either the wildlife folks would show up in 24 hours and remove the critter, or it would die and I could safely remove it myself with gloves and a shovel. I didn’t need to act right away, and doing so could actually have caused more damage.
The same thing is going on in the markets right now. The thumps and bumps of market volatility have a lot of folks spooked. But some people are checkers – they look at what the market is doing daily and try to develop a short-term solution. They are convinced if they act now, they can save themselves from whatever may be lurking in the dark. Other people are waiters. These folks develop a long-term solution and trust that their plan will work out for them in a defined period of time. I’ll let you guess who sleeps more soundly through the thumps and scratches.
The key to surviving volatility, hysterical commentators, and even market corrections (which will happen), is to have a long-term plan. To be able to disengage enough from the noises in the night to ask the following questions:
“Would I buy this stock/invest in this manager/choose this strategy today?”
“Has anything fundamentally changed with this stock/manager/strategy or is this purely market movement?”
“Do I need liquidity from this investment now or in the immediate future?”
“What conditions would need to be in place for these undesirable changes to become the new status quo? Are those conditions likely to occur?”
By logically thinking through what might be causing the noise, it is possible to develop and stick to a plan that reduces reactivity and focuses on long-term goals and objectives. After all, in the words of Warren Buffett, “In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”
Don’t get me wrong. I am a fan of active investing and I’m not saying, “let it ride no matter what!” I am not, however, a fan of re-active thinking. I believe successful investments require discipline. And while you might jump when you hear noises in the market, you need a plan and conviction to avoid letting the rampaging honey badger into your portfolio.