As I write this column on Thursday, Oct. 3, 2013, the stock market is reacting negatively to news headlines:
“Obama warns shutdown risks U.S. default”
“Exasperated Obama warns Wall Street that we are in trouble”
“Obama warns Wall Street should be concerned over Washington crisis”
“Obama warns of economy risk”
“Obama on debt limit: This time’s different”
“Obama to investors: Please panic, at least a bit”
“Wall Street wonders if Obama wants a selloff”
These types of headlines inspire fear. If you are an investor, should you run for cover?
Speaking as a money manager, I can tell you this: Seasoned traders might buy and sell based on news. Everyday investors should not.
Instead, they should develop a buy-and-sell methodology that is consistent with their personal investment plan.
I say “personal” because every individual investor’s situation is different.
For example, a 30-year-old investing for the future will have a different risk appetite than a 65-year-old embarking on retirement. A retiree who lives off his savings has different needs than a retiree whose pension covers his needs. A 75-year-old couple with children and grandchildren will have different financial decisions before them than a 75-year-old who has no close family members, and so on and so on.
I say “plan” because “no plan” means your investment decisions are nothing more than random ... and therefore susceptible to influence from outside events and news.
A good plan will be founded on an understanding of your needs, your wishes, your assets and your ability to make sound investment decisions based on the knowledge and skill you’ve developed as an investor through the years.
All good plans consider an exit strategy and a disaster scenario that ask and answer the following questions: What is the worst-case scenario, and what will I do if it happens?
On Thursday, the U.S. Treasury issued a report that provides us with such as scenario. Titled “The Potential Macroeconomic Effect of Debt Ceiling Brinkmanship,” the report focuses on debt-ceiling debates and the consequences of a potential default by the U.S. on its debt.
“A default would be unprecedented and has the potential to be catastrophic. Credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could skyrocket, the negative spillovers could reverberate around the world, and there might be a financial crisis and recession that could echo the events of 2008 or worse.”
It is highly unlikely that Washington would be foolish enough to allow a default. Paraphrasing Richard Hoey, chief economist at the Bank of New York Mellon, if a default occurs under President Barack Obama’s watch, it will be his legacy.
Other potential disasters will present themselves during an investor’s lifetime.
Every investor needs to know whether he or she will allow emotions to dictate. With a plan, that will be less likely.
Here are some things to think about:
As an investor, you cannot predict the outcome, but you can assess your own investments to determine your personal sensitivity to risk and volatility.
You are at risk of acting against your best interests if:
1) You don’t know how to think of risk.
2) You don’t have a selling discipline.
3) You don’t pay attention to how your investments are doing.
4) You are leveraged (investing on margin or holding leveraged investments, such as leveraged exchange-traded funds).
5) You are concentrated in a particular stock or sector.
6) You are getting ready to retire, and your Social Security and pension added together aren’t enough to cover your needs.
7) Your investment time horizon is short. For example, you expect to make a large purchase within six months to a year.
8) You don’t have a plan.
Knowing yourself goes a long way to making sound investment decisions, especially in uncertain times. When unsettling events unfold, the last thing you want to do is panic, even a bit.
Julie Jason, JD, LLM, a personal money manager (Jackson, Grant of Stamford, Conn.) and award-winning author, welcomes your questions/comments (email@example.com).