David Fabian: It seems like every time you turn on the financial media that they are talking about a playbook for some upcoming crisis or event. That may include the FOMC meeting, BREXIT vote, presidential election, gold manipulation, options expiration, currency upheaval, economic data, etc…
The obvious benefit for broadcasters and bloggers is that they have something seemingly interesting to talk about. This usually occurs in tandem with a lineup of “experts” willing to tout their views on probable outcomes in the stock market. It may even include a list of sectors or stocks that you should own if a certain result materializes.
The real question you should be asking yourself is – do you need a playbook to begin with?
If you are a day trader that is focused on making swift in or out decisions with your capital in a matter of minutes, then yes you may need to have a few scenarios drawn out ahead of time. It may help you pull the trigger quickly, rather than scrambling to catch up to the speed of trading. The reality is that you can probably set up automatic triggers ahead of time to either buy or sell if the market moves in a certain manner.
For virtually everyone else, the answer is no. There is absolutely no need to diagram out all sorts of harebrained flow charts on if the Fed does this, then I will sell this, but if they go the other way then I will buy that. It makes for decent TV (maybe), but it won’t make you any money.
Sometimes there are historical analogues that can be drawn from for context. However, the truth is that no two events unfold in exactly the same manner. There are always going to be differing circumstances that affect the outcome of the stock, bond, or commodity markets. Don’t be fooled by those who are trying to offer you a prediction wrapped in the cloak of investment advice. It’s not their money at risk, it’s yours.
All of the hype surrounding these big events usually boils down to how to preserve your capital rather than profit from the outcome. As a result, investors spend an inordinate amount of time worrying over outcomes that no one has a way of predicting. Constant anxiety over bear markets, recessions, crashes, or other outlier events will only ensure that you don’t participate in the wealth building effects the market has to offer.
Rather than fretting over how stocks will react to a particular event in advance, it may be more advantageous to simply watch what transpires over several days or weeks. If there does appear to be a significant change in trend or adverse consequences to your portfolio, you can then make minor adjustments to re-structure your asset allocation. That is a far more reasonable and reliable approach to portfolio management than foolishly trying to anticipate every peak or valley ahead of time.
Ultimately, the onus is on you to understand that you can’t game plan every event in the market or life in general. Sometimes you just have to play the hand you are dealt and try to minimize the impulse for an emotional response that results in a big mistake.
Often the best plan is just to do nothing and let any transient volatility settle before taking action.