When you check your portfolio to discover that your holdings are going down, or already in the red, how does that make you feel, physically? Likely, it is a slightly painful feeling and you get sweaty palms, feel lightheaded, get a weird feeling in the pit of your stomach, or maybe you feel pessimistic (or optimistic)?
When you look at your portfolio, at your current holdings or where you are placing your bets, and see a negative signal your body immediately responds with those physical sensations. There is a sense of ‘something wrong is happening’
When I was a student pilot learning to fly a Cessna 172R, many times my 6th sense would kick in and the sensation of ‘something is wrong’ was a really helpful tool. If often meant that the plane was about to stall, and as a student, those are the types of things you train for. You learn from those physical sensations so they are not a source of anxiety, but rather utilize it as a source of information so that you could better understand and react when you need to take action to alleviate a problematic situation.
If you look at your portfolio and see a bunch of red, your instant response is to feel that emotional reaction. You immediately begin to feel negativity, anxiety, the physical sensations of sweaty palms, etc. The problem occurs because at this point you are ready to react and you are unlikely to react by making the best decisions. Instead, you will make a short-term decision, and very quick and emotional decision, and will not be a thoughtful, rational, or disciplined reaction to what has happened.
The challenge, or opportunity, is where we look at our portfolio during our routine or process. Most individuals like to look first thing in the morning and typically their first ‘look’ is at their own portfolio. If this is the case, you are setting yourself up for that emotional reaction.
What I recommend is to put it at the end of the process. Start by looking at the big picture and gathering as much information as possible by having a good situational awareness. Once you have done that and you have developed your own thesis of where things are and what you expect is going to happen, then you can go ahead and look at own portfolio.
At this point when looking at your own portfolio you can decide where you are vs. what you thought was going to happen. Additionally, you can decide what changes you need to make to match the evidence. The benefit of utilizing this process is that you are now making decisions based on the evidence you have gathered, and not based purely on an emotional reaction to all of the red on your portfolio.
RR#6,
Dave
Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. Please see the Disclaimer page for full details.