Many are familiar with the classic 1990s sitcom, Seinfeld, which cherished everyday comedy amid ordinary circumstances. In one episode, “The Opposite,” (1) the foibled character, George Costanza realizes that every decision he has ever made in his life has been wrong. His buddy, Jerry Seinfeld declares, “if every instinct you have is wrong, then the opposite would have to be right.” Although the episode was unrelated to investing, there is some truth to this statement when it comes to instinct versus knowledge in the management of your portfolio.
The “Buy Low, Sell High,” philosophy of investing states that in order to profit, you must purchase a stock or mutual fund at a low value and sell it at a higher value. However, for many investors, following this principle is a challenge and goes against their instincts. They see a stock or mutual fund soaring in price, so they decide to purchase it and ride the wave of growth. Conversely, they may hold a position in their portfolio and the minute they see the value decrease, they want to bail out of it like a sinking ship.
The problem is, the stock market doesn’t work like the waves of the ocean or a sinking ship. A stock or mutual fund’s value may rise, peak, and crash, only to resurface and regain strength yet again. It’s important to seek the guidance of a professional investment advisor who can help steer you away from making emotional decisions. Together, you can consider your personal risk tolerance and your time horizon for liquidating the investment. It may be a difficult pill to swallow, but when an advisor knows the facts about your situation, they may sometimes advise you to do the opposite of your own instinct to prevent you from making an investment blunder.
Investor’s memories are notoriously short, and though past performance is not indicative of future results, it is still helpful to look back and learn from our stock market mistakes. In the early 2000s, the Science and Tech / dotcom bubble burst. (2) The reason that it had such an enormous impact on the stock market is because most every investor over-invested in that one sector because they saw its unprecedented growth and they wanted to capitalize on it. When the dotcom stocks crashed, it affected everyone from large investors and banks to small time investors with a $1,000 balance in their 401(k). People did not buy low and sell high, instead, they reacted with emotional instinct and bought high and sold low.
Today’s version of the dotcom boom has even been compared to the surge of investors chasing the cryptocurrency market (Bitcoin, Ethereum, etc.) Any time an investment reaches extreme hype, it is wise to step back, and ask a professional about whether or not it is the right addition to your portfolio. If everyone you know is investing the same, it may be time to start doing “the opposite” of the masses.
Your personal risk profile and time horizon must always be considered for any investment you consider. Talk to your advisor about portfolio diversification, time horizon, risk tolerance, and the dollar-cost averaging method (investing small amounts over the course of time to avoid “timing the market.”) These considerations will help you build a portfolio that addresses your personal financial needs and goals.
(1) https://www.youtube.com/watch?v=RerJWv5vwxc & https://en.wikipedia.org/wiki/The_Opposite