You've probably read about behavioral finance research. The conclusion is generally the same, no matter what aspect of our decision-making is being probed the human mind is hard-wired to process information in certain ways; these can be partially explained as behavioral biases. These behaviors/instincts would be extremely helpful when the environment contained gazelles (timid) and saber-toothed tigers (dangerous), but are not so helpful when we're navigating the unfamiliar terrain of the investment markets. Instincts may help in certain areas of our lives today but have no place when considering investing. Case in point, people shop looking for bargain prices, rather than flocking to stores where the price tags have been constantly revised upwards for the past 12 months. But for some reason, they do the opposite when they're shopping for investments, why the disconnect?
There used to be a day when the investment markets and the U.S. economy were not controlled, rigged or otherwise directly manipulated by the U.S. central bank. But we are far from that today, as evidenced by yesterday's market reaction to Federal Reserve Board Chairperson Janet Yellen's press conference, and the release of the minutes of the Fed's most recent Federal Open Market Committee (FOMC) meeting. By the end of the day, the Standard & Poor's 500 index had dropped 0.61 percent, the Nasdaq Composite slipped 0.59 percent, and there was an immediate sell-off in US Treasury notes.
The current events in Ukraine can evoke thoughts to the Cold War. Whenever we see troop movements and fires raging in the streets of a capitol city the size of Chicago, our instinct is to assume the worst and move our money to the sidelines. But is this really the best strategy?
I want to keep this simple. Many of the portfolios we manage at Private Wealth have exposure to emerging markets. A typical portfolio with 60% in growth/equity and 40% safety/fixed income will have 5% in the emerging markets. Of the 5% about 4.5% has exposure to Russia, Ukraine if represented would be extremely insignificant from an investment perspective.
Is the recent stock market drop pulling at your emotions? Are you beginning to ask yourself the dreaded question, should I do something with my investments?
On Monday, the U.S. markets dropped roughly 1% of their value, and Europe and Asia were down by similar amounts the following day. The market (the S&P 500) then fell 2.1% on Friday in a sickening lurch. This combination was enough to cause pundits and investors to ask whether we are now in the early stages of a bear market or, indeed, if the past almost-five years should be considered an interim market rally inside of a longer-term bear market.