Should you trust your gut when it comes to investing?
Do you sometimes believe you “just know” which direction the stock market is about to head? Do you sometimes rely on gut instincts to make investment decisions?
I bet you have. You may have felt nervous because the market seems high (time to sell) or excited because it’s low (time to buy). Don’t feel too bad about that. Your gut, or instincts, are a way of unknowingly processing current information using past experience. You are thinking without thinking. Your gut is a powerful ally for keeping you alive. Its rapid-fire reactions ensure you leap away from that truck hurtling your way, before you even think about it. (Malcolm Gladwell’s book “Blink” is a great read on this.)
But ignore your gut when it comes to investing. In highly efficient markets, you’re pitting your ill-informed instincts against the market’s magnificent pricing mechanisms.
Say your gut is telling you it’s time to get out the market NOW, fearing COVID-19, U.S. debt, China sanctions, presidential elections, … whatever. Remember: The market is a global auction of buyers and sellers. Each trader is making buy/sell decisions on the sliver of data they can see. Some views argue for stocks to go up, others argue for them to go down. Investors meet in the middle, at pricing based on their collective wisdom.
So, is your gut (or some media guru’s gut) telling you to try trading ahead of a market’s impending rise or fall? To accurately time the swing, you’d need to know two things:
- You’d need to know about everything that’s going to happen next in this big, wide world that might adjust current pricing.
- You’d also need to know how investors will collectively react to whatever is going to happen next, resulting in rising or falling prices.
Your gut doesn’t have enough past experience to answer either question correctly. Here’s what I suggest instead: Put your short-term investments in something more conservative than the stock market. For your long-term holdings allocate more to stock and then ignore your gut. Trust that our global economies – and stock prices along with them – will continue to expand over time, as they always have.
To learn more about how our biases impact our investment decisions, visit our whitepaper page at https://alliantwealth.com/resources/whitepapers.html and download “The ABCs of Behavior Biases.”
John A. Frisch, CPA/PFS, CFP®, AIF®, PPC™ founded Alliant Wealth Advisors in 1995 and has over 30 years of experience as a financial professional. In his free time, he’s an avid long-distance runner, a sport that requires discipline, patience and vision. John applies these same skills to his professional pursuits: He helps families and retirement plan sponsors adopt a patient, disciplined approach to overcoming financial challenges and reaching their distant goals along a clear path. Learn more at www.alliantwealth.com.