You’re sitting in your nice, new, comfortable home. You bought it planning to live in it until you retire. Maybe longer. Given your age, you figure this is still several decades away. Just as you start to relax, there’s a knock at the front door.
Opening the door, you see someone looking rather stressed and bedraggled.
“Yes?” you ask cautiously. Your unexpected visitor announces, “I’m your neighbour. I just wanted you to know that I’m willing to buy your house today for 60% of what you just paid for it…”
You quickly interject, “Uhhh… no thanks,” and firmly close the door.
Unfortunately, day after day, that same neighbour shows up at your door to tell you how much he’s willing to pay for your home. On most days you manage to ignore him. But he seems to shout the loudest when his price is either really high or really low compared to what you paid.
Most of us would call the police on such an annoying neighbour.
But what if instead of a noisy neighbour telling you how much he’s willing to give you for your home, it’s the news outlets constantly telling us what the market is willing to pay for our portfolio. It’s just as annoying, but you can’t call the police on them.
Like buying a house, most people purchase an investment portfolio to provide them with a lifetime of benefits. Despite that very long term horizon, we are exposed on almost a daily basis to information about what the market is willing to pay us if we decided to sell out. But here’s the rub, we’re not selling out our entire portfolio today, we’re not selling out tomorrow and, in fact, we’re not selling out for the rest of our lives if we can help it.
Selling out now is counterintuitive in any case. When our noisy neighbour offers us a low price for our house, we ignore him. But, when we’re offered a low price for an investment portfolio, people can surprisingly react quite differently.
The reason they may act differently is usually a combination of fear and uncertainty.
Ironically, many investors feel compelled to sell out just because someone is willing to pay them less than what they paid for the same portfolio. And, there couldn’t be a worse reason to sell.
In the long term, selling assets at a lower price than what you paid for them is not a profitable strategy. If you were a trader, it would be a fast track to the poor house. It’s an especially bad idea to sell long term investment assets just because daily prices may have fallen. Because history tells us that in previous difficult markets, diversified portfolios have always recovered. Every single time.
You might say, “but I’ve lost money and I need to sell while I still can.” But the reality is, you only “lose” when you sell and crystallise the loss. Until then, it’s just another crazy price proposal being put forward by your noisy neighbour, Mr Market.
Instead, view your portfolio just like the house in which you intend to live for decades to come. And treat the daily market noise just like that annoying neighbour, one which we are only too happy to ignore.
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This article was initially shared by Ben Brinkerhoff, Head of Adviser Services, at Consilium.