As most of you know, the situation in Greece has been dominating the business news as of late. As this unnerving situation has unfolded, questions regarding bank closures and the uncertainty of whether or not they will remain in the Euro has understandably caused a degree of confusion in the global markets.
As we step back and look at this situation, as investors, we must ask ourselves:
How do we best deal with this situation – what should we do?
Our simple answer is that we must remain disciplined and diversified.
If we take a moment to reflect on recent history, we quickly realize there have been many emotional and financially destabilizing events over the years. For example, just in my lifetime we have experienced the following:
1) The Market Crash of 1987
2) The Savings and Loan Crisis in 1989
3) The Asian Contagion in 1998
4) The Tech Crash in 2000
5) 9/11 in 2001 6)
And of course, we all remember the dire financial events of 2008.
All of these events have been unique, with different causes and effects, but they all lead to a similar degree of panic in the market. Many investors made rash decisions in an effort to protect themselves. The unfortunate result is that these quick decisions typically lead to lost money and poor investment performance.
To make matters more difficult for us, as human beings we are all subject to something called “Hindsight Bias.” This is the inclination, after an event has already occurred, to see the event as having been predictable in the first place. This happens in all walks of life, but it is particularly evident and troublesome when it comes to investing. Once the events in Greece unfold, it will be easy for some to say “of course, we should have seen this coming”, but the reality is that no one knew how the events would unfold, yet it always seems so obvious after the fact.
So why is Hindsight Bias so troublesome for investors? It tricks us into the notion that we should be able to make predictions . However, history has been consistent in showing us that market timing, based on predictions, leads to long term disappointment as an investor.
There has been one strategy that has consistently carried us through all of the turbulence and uncertainty, and that is to remain disciplined and diversified. In times of stress and uncertainty, it is more important than ever to stick to the plan. It is easy to stick to an investment plan in good markets, however it can be very difficult, yet quite rewarding, to stick to the investment plan in shaky markets. Diversifying our money into different areas of the stock and bond market in the right proportions is one of the only ways to give us the best chance of long term success. It can help minimize the damage from short term corrections, but more importantly it puts us on a path towards long term success.
The reality is that no one knows exactly how the events in Greece will unfold. Further, and perhaps more importantly for us as investors, no one knows exactly how the stock market will react to the events. Let’s focus on what we can control and stay disciplined and diversified.