Washington is shut down, but there’s no need to panic. Because these things don’t last.
Fifth Third to buy Comerica in $10.9 billion stock deal
Fifth Third to buy Comerica in $10.9 billion stock deal
Scripps News – WXYZ Detroit
If you’re like me, and like almost every investor in the world, you experience a range of emotions on a daily basis. For example, it’s hard not to feel something when you watch stocks rise and fall. When that feeling becomes strong enough, you may decide to act on it, but that can lead to short-term decisions that can ultimately have a negative impact on your long-term financial health.
As the government shutdown drags on, here’s one big emotion-driven investing mistake to avoid.
There is a science behind emotions and investing.
When we talk about investing, we cannot ignore the emotional side of the activity. Fear and greed are powerful forces that can sometimes make people do shocking things. When it comes to investing, there is a lot of literature and research on the emotional side of the process, known as behavioral finance.
There are many good books on this subject. I personally re-read The Little Book of Behavioral Investing. How to avoid becoming your own worst enemy This quote, written by James Montier every year, speaks to how important I believe it is to understand our emotions. It’s a short and simple read that can actually be quite entertaining, but the big benefit is that it reminds you of the mistakes you can make if you don’t control your emotions. The list of pitfalls is very long.
What I think is most important right now is the habit of people extrapolating things too far into the future. I see things like this happening all the time. For example, at the height of the coronavirus pandemic, Wall Street picked up on and chimed in with stories of health concerns and economic shutdowns.
Data by YCharts.
In the medical field, companies that manufactured vaccines such as pharmaceutical giant Pfizer (New York Stock Exchange: PFE)saw stock prices rise significantly. It was as if investors believed the world needed an ever-increasing supply of COVID-19 drugs. That wasn’t the case. More normal market dynamics soon returned, and many once-popular drug stocks, including Pfizer, collapsed.
The same goes for online shopping, where investors have driven up prices for shipping companies like United Parcel Service as package volumes have increased. (NYSE:UPS). Investors seemed to believe that people would never shop in brick-and-mortar stores again. Once the health scare passed and people started returning to stores, shipments returned to more normal levels. Unsurprisingly, UPS stock fell, and business fundamentals once again ruled the day.
This too shall pass, so don’t treat it like it never will.
Given the sometimes exaggerated media attention given to government shutdowns, it’s important to take a step back and consider the facts. There have been multiple government shutdowns since 1974, when the Congressional Budget Act was passed. The longest closure lasted 35 days.
You probably shouldn’t make long-term investment decisions based on things that are likely to be over in a month or so. In fact, if history is any guide, this impasse could last much less than a month. The 35-day government shutdown is only the longest period of continued fiscal gridlock. Even if this closure extends beyond 35 days, it is unlikely to be permanent. Both sides in Washington, D.C., will eventually reconcile, as they have in the past.
Data by YCharts.
The graph above is the S&P500. (SNPINDEX: ^GSPC) The problem began in 1974, when the Congressional Budget Act was passed and government shutdowns began to become a significant government issue. Note that since then, the S&P 500 index has not become a huge loss machine. It’s been rising steadily, just as it was before this bill was passed.
Even if this particular shutdown leads to a bear market, those economic downturns will also end. Every bear market in Wall Street history is eventually followed by a bull market (and vice versa). The worst thing you can do is take a short-term event and invest in it as if it will change Wall Street forever. The closure will almost certainly be a short-term event.
stick to long-term plans
You need to have a long-term investment plan. This plan is long-term precisely because it is intended to overcome short-term events like a government shutdown. Don’t let your emotions upset your plans by extrapolating the impact of short-term events too far into the future. That may be one of the biggest behavioral investing risks you face today.
Reuben Greg Brewer has no position in any stocks mentioned. The Motley Fool has positions in and recommends Pfizer and United Parcel Service. The Motley Fool has a disclosure policy.
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