“If we don’t discipline ourselves, the world will do it for us.”

- William Feather, American author

After four years without a 10 per cent correction in the S&P 500, August issued a reminder to investors: stocks do go down. In fact the saying is that stocks take the stairs up and the elevator down. As shares plummet, people begin to focus on their portfolios and regain a sudden, more intense, focus on investing.

What Happened

Every dinner party I attend or social function (even kid’s birthday parties) I get asked the same inevitable question: “What happened to the markets?” If I was dishonest I would probably spend the next 15 to 30 minutes regaling the questioner with an elaborate tale about China, the Federal Reserve or even stock market valuations. I’m sure I could twist an eloquent tale.

To be honest, most investors seem to need an explanation even when one is truly not 100 per cent discernible. The truth, in regards to the market, is far more nuanced than most people will accept. The real truth, in fact, is that no one really knows. It is often a culmination of events, aspects and structural issues that coalesce to cause sharp corrections. After the fact many pundits will give their take on the reason but it doesn’t necessarily mean they are right or wrong. As Marty Sosnoff used to say: “If somebody yells fire in a theatre, everybody runs. There doesn’t have to be a fire … If you stick around, the theatre is yours. If there is a fire … well, at least you die alone.”

Selling Is Easy

When markets crash it is actually very easy to sell stocks. The media, bloggers and bears will offer an investor numerous salient and often intelligent sounding reasons to reduce risk.

The hard part, and the fact many investors struggle with, is when to get back in. As market’s collapse, cash becomes a security blanket that is very difficult to detach from. Investor’s risk tolerance also tends to shift. When stocks are moving up, volatility is low and there is nothing but blue skies, investors tend to believe themselves to be bolder and more accepting of risk than they may actually be.

When stocks decline investors’ risk tolerance naturally shifts and is nowhere near constant. Risk aversion and fear make it almost impossible to maintain a constant risk profile. Famous market aphorisms like “be greedy when others are fearful” or “think long-term” often lend very little comfort.

What To Do

So if you don’t believe it’s important to try and speculate which way the “market” is going to go and you don’t want to waste your time trying to predict exactly where the market is going what should you consider and do? Here is a simple list:

1) Know what you own and what it’s worth. Market prices are there for you to take advantage of, assuming you know the value of what you have. If you focus on the prospective price change of a purchase you are speculating. There is nothing wrong with speculation per say but I am uncomfortable doing this with my money. Half of all coin tossers will win their first flip but none of them are expected to have unlimited profits if they continue to play the game.

Just because an asset has risen in the past is no reason to buy, neither is there a conclusive reason to sell just because the price has fallen. Focus on what your assets can produce and not their daily fluctuations. In the immortal words of Buffet: “Games are won by players who focus on the playing field — not by those whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.”

2) Implement or stick to your strategic plan. This plan should at minimum involve consideration for the diversification of your assets and your ability and desire to take risk with your long-term goals and time horizon.

3) Implement rules based systems for buying and selling assets at predetermined levels. Don’t change the rules just because the markets have changed. Don’t let fear or greed drive your investing decisions, let sound principals and practices lead the way. An investment portfolio is like a bar of soap: the more you handle it the smaller it gets. Never take investment action for a non-investment reason.

Sell offs are not fun. Watching capital lose value can be extremely stressful. The point is not to make light of these feelings but note that adhering to sound financial principals offers some comfort in stressful times and offers investors much better odds of having successful financial outcomes over time. Stocks do go down but they also go up.

• Nathan Kowalski CPA, CA, CFA, CIM is the Chief Financial Officer of Anchor Investment Management Ltd. and can be reached at nkowalski@anchor.bm Disclaimer: This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.