Learn more about Patricia on NerdWallet’s Ask an Advisor
Continuing political brinksmanship has caused a great deal of recent market volatility – until the budget and debt ceiling issues got settled, temporarily. This market volatility offered a very good lesson in the role of the stock market as a leading indicator – as the landscape shifted, the market ups and downs were a sort of prediction of how things would be, economically speaking, out about a year, as result of whatever outcome looked most likely at the moment. The overall pattern did not really indicate anticipated disaster, and displayed some faith that a short term fix, at least, would be put in place.
Yet, we may be facing this again in just a few months. And we humans, who tend to think (often unconsciously) that whatever is going on right now (or what we think is about to happen) will go on forever, will once again feel the sword hanging over our heads. We will lurch once more between dogged optimism and the feeling that the world as we know it is about to end.
Even in less dramatic circumstances, a perceived pattern can convince us that more of the same (whatever that may be) is on its way. I can give you a recent example from my own life:
A few weeks ago, I participated in a performance of a major choral work (the Monteverdi Vespers). Rehearsals had gone well, we had wonderful soloists lined up, we knew that the Baroque orchestra collaborating with us would be excellent. Then came dress rehearsal week – the main tenor soloist came down with laryngitis, the little Baroque organ that we rent was very cranky due to a faulty switch, and finally, one of the cornetto players (and they are not easy to find) also became ill. Our conductor had to rapidly re-assign parts to folks who didn’t even know they were going to be soloists, find a replacement cornetto player, and even undertook a big chunk of the missing tenor solos himself (while still conducting the whole thing). We do know how to cope. The first half of the first concert went quite well, considering the adjustments that were needed. But, as we lined up to go on stage for the second half, the conductor stood in front of us and said “I have an announcement, and it’s serious. There’s a problem with the second cornetto player.” Dramatic pause, while we all looked around, wondering what ELSE could go wrong. Then, the conductor added “And I am going to play the second cornetto part!” and started laughing madly. It was a joke, and we finally all started laughing as well, but he had hooked us with this prank. So much had gone awry during the week that we were perfectly willing to believe (at least for a moment) that something else had also gone wrong.
What is the point of this story? It shows that humans are rather inclined to continue to believe the worst, if something bad has already happened. We are then primed for pessimism, as it were. This was a useful behavior in more primitive times, as it protected us from dangerous situations (such as predators) based on previous experiences. But, we also have a natural optimism (yes, we can take down that mastodon and feed the tribe!) which we need to tap during tough times, helping us to remember how well we had coped before.
My advice: as always, look to the long term and don’t assign too much predictive ability to chaotic behavior in the government or in the markets; in almost every case that behavior is a short term reaction to the uncertainty that we all feel and fear in the absence of a solid (or even temporary) solution to a government squabble or economic disappointment. There is no clever solution that will immunize your portfolio against these fluctuations, get you out at the right time in order to preserve your gains, and get you back in before you miss the train as it leaves the station again. You can immunize yourself by avoiding too much reading, news watching (especially cable finance stations), or Internet since this is the white noise that blots out rational thinking. No one really has THE answer. Just remember, they want you to stay tuned so that you will see the ads that will be inserted between the worrisome teaser headline and the purported solution. They are not really there to keep you informed. Too much information actually can lead to bad decisions, and those decisions can be even worse if the “information” is of poor quality. Trust your advisor to watch your back, and to let you know if there IS something you need to do!