Best time to define goals and objectives is not during volatile market

By DAVID MOON, Moon Capital Management, LLC
August 21, 2011

The intense volatility of the stock market over the past three weeks crystallized a number of things, not all of which were negative. Crises – real, imagined and exaggerated – often force us to do something that is ideally done without the pressure of an emergency: define our objectives and goals.

Sometimes, however, we wait until we find ourselves at an impasse to decide what is really important in our lives.

When the Dow Jones Industrial Average declined 1,100 points in two days, followed by multiple hundred-point intraday moves for the next three weeks, I saw the widest possible range of reaction and emotion from individual investors. Some panicked, sensing a return of the 2008 market collapse. Others were interested in the operational issues surrounding the volatility, but are otherwise emotionally ambivalent to the market mayhem.

The difference? The more calm investors have specific intentions for their capital, and their money is generally invested consistently with those intentions.

The people who have been most worried about their investments over the past few weeks generally fall into one of two categories: those who lack clearly defined investment objectives and those who have well-defined objectives but their money is invested in a way that is inconsistent with those objectives.

If you are in an asset-accumulation phase of your life, market volatility provides an opportunity to buy assets at lower prices. If you don’t have a clear path for what you are trying to accomplish with your money, it is impossible to know whether short-term market fluctuations are opportunities or fatal setbacks to those undefined goals.

Some people do have clearly defined goals but their assets aren’t invested consistently with those goals. This group includes its share of chronic worriers, as well. If someone is in a withdrawal phase of their investing life and has all of their assets bouncing up and down five percent in price every day, they are probably experiencing some nervousness.

They probably should.

There is a huge difference between the investing and the planning process. A proper investing process is rational and logical. There should be no emotion involved in the decision to buy or sell IBM or a two-year Treasury note.

The planning process, however, must include an emotional accommodation. You must be able to weigh your long-term ability to withstand volatility against the point at which you begin to lose sleep.

That assessment is best made in the calm, not in the midst of highly volatile trading days. If you understand the relationship of risk and volatility to your goals and your psyche, you will be less panicked in more volatile times.

Too many people define their investment goal as “making some money, without taking too much risk.”

That may be a nice platitude, but it doesn’t do much to specify an investor’s priorities. And the middle of a 500 point one-day decline in the Dow Jones Industrial Average is not a great time to define your priorities.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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