It’s been said that the difference between danger and disaster is preparation.
“Be prepared” is the motto of the Boy Scouts, and it’s good advice when you’re headed into the mountains. You need to be physically ready for challenge of the peaks—core body strength, cardio-vascular endurance, and mental energy. You need to have adequate clothing and emergency supplies, like a headlamp and compass. And you need to know the mountain and trails you’re going to. Maps, guides, and experienced friends help you understand where you are and what surprises might be around the next bend in the trail.
Investors need to be ready for what the markets might throw at them as well. Research, documentation, and mental preparation are critical to dealing with the surprises that markets inevitably send us. Researching investments can take time, but it’s worth it. If you understand what a business does and how it generates its cash, then the market’s gyrations are less likely to cause you to panic.
Documenting your decisions is also a great defense against second-guessing yourself. Going back to your files to see why you bought or sold what you did when you did will help you learn about both the markets and your own mind. And understanding ourselves is the real key to investment success. Recognizing how much risk you can tolerate and your other limitations is an ongoing process—and the way we prepare mentally for the markets.
With preparation, market volatility becomes opportunity. Without preparation, it can lead to permanent losses to a portfolio.
Douglas R. Tengdin, CFA
Chief Investment Officer