MarketWatch: Ask yourself this question in light of today’s stock market: Friday October 02, 2015

By Chuck Jaffe

Published: Oct 2, 2015 5:02 p.m. ET

Why did you buy a particular stock or fund in the first place?

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ChuckJaffe

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Andy Arnott, president of John Hancock Investments: ‘You have to review
your ultimate goal and why you are investing the way you are investing,
because it’s easy to lose sight of that when the Dow drops 1,000 points
in a day.’

The question everyone is asking about their investments today is simple
enough: ‘Should I get out?’

Ask that question aloud and you will find some Pollyannas telling you
to stay in and be happy forever, and you will hear from Debbie Downers
who can’t understand why you weren’t out months or years ago because
they can see Armageddon on the horizon. The stock market action on
Friday, in which the S&P 500 and the Dow Jones Industrial Average had
their biggest single-day price swings in four years, is certainly
confusing a lot of investors.

The real answer to whether an average investor should stick with a
long-term investment depends less on what is happening in the market
and much more on why the investor bought the fund in the first place.

Alas, most investors have a lot of reasons to buy a fund, but one
stretch of troublesome performance and those reasons are forgotten, the
logic is thrown out the window and all that stays in focus is the
short-term results. This is why investors wind up chasing performance,
even as they insist they don’t; it’s why studies like Dalbar Inc.’s
annual ‘Quantitative Analysis of Investor Behavior’ show that investors
miss out on a big chunk of the return they could get by sticking with a
fund or simply holding a market index fund.

‘Would I buy this fund/stock again today?’ is a simple question that
most investors are poorly equipped to answer, which is how they get
upset by a downturn and bail out without reconsidering their
motivations.

‘In times like these, the conversation and the focus tends to be all
about performance, and while you can’t blame somebody for being worried
when the market falls by 500 or 1,000 points, that tends to take their
eyes off of what’s important, which isn’t what an investment is doing
‘today,’ ‘ said John Hailer, chief executive officer at Natixis Global
Asset Management. ‘The volatility makes people nervous, and the adviser
gets a call asking: ‘Why is this fund underperforming?’ They should
instead be talking about why they bought the fund and is it still doing
its job.’

Most shareholders make the process harder on themselves right from the
start, by failing to write down their thinking at the time of purchase.

An investor who looks to diversify a portfolio by purchasing a range of
asset classes ‘ adding real estate, gold, international stocks and more
to a portfolio ‘ should not lose sight of the idea that selling those
investments loses the benefits of diversification.

Ideally, an investor writes down every factor that contributes to a
buying decision, so they can see what has changed and always be
prepared to answer whether they would buy again today.

As such, if a manager or a research firm’s rating is a big reason for
buying a fund, the investor who reviews their purchase years later can
see if basic underpinnings have changed.

But most investors add to their portfolio for asset-allocation reasons,
hoping that exposure to a wide range of asset classes mitigates risk,
balances out performance and more. Unlike traders, their motivation is
less quick-hit, right-now profits.

Also see: Markets are back at panic levels, says Credit Suisse

When they sell during a downturn and get swept up in the volatility,
they’re abandoning that long-term thinking for what an investment has
done (or hasn’t done) for them lately.

Lacking some record that shows the thinking that went into a buy,
investors should reconstruct their logic before pulling the ripcord
now.

Consider what the investment added to the portfolio. Was it a new asset
class or management style? And what were the realistic expectations for
performance?

Weak jobs report: what it means for the Fed

(1:31)

The U.S. economy created 142,000 jobs in September, coming in below
expectations. WSJ ‘Heard on the Street’ deputy editor Spencer Jakab
reports on how the data is likely to impact the Federal Reserve’s
timing for an interest rate hike. Photo: AP.

Ask yourself what has changed since the fund or stock was purchased? If
the investment itself is no longer promising, that’s far different from
the business prospects remaining good but the market cycle having
changed to where something is now out of favor. Most investors
understand that securities go up and down and that the idea is to live
through the disappointments and capture the long-term trend, even if
they typically buy things while they are in an up phase.

Look at what your remaining portfolio has if the investment is removed;
no one should add something to the portfolio without thinking they are
making their holdings better, so make sure you believe you can now
subtract the investment without regressing to something worse.

Consider where the money is going next if you make the sell decision,
and whether that movement actually improves your holdings or if it just
improves your mood.

‘The majority of investors today need the financial markets to reach
their objectives,’ said Andy Arnott, president of John Hancock
Investments, during an interview on my radio show, ‘MoneyLife With
Chuck Jaffe.’ ‘Without the financial markets, I don’t know that the
majority of Americans will reach their retirement goals, so you have to
stay focused on the long-term. ‘ You have to review your ultimate goal
and why you are investing the way you are investing, because it’s easy
to lose sight of that when the Dow drops 1,000 points in a day.’