A Little Trick for Coping with a Correction

A Little Trick for Coping with a Correction

If you are reading this note, everything’s fine. Its not the end of the world, contrary to what the financial media may be telling us. Yeah sure, markets are down, but hey, what’s new?

Corrections occur all the time. It’s just that we haven’t had one for a little while (like 9 months – which is a long time nowadays in the stock market), so most investors have forgotten what it feels like. Here’s a recap of historical declines from 1900 to 2015:

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How do you deal with these situations? My colleague Josh Brown of Ritholtz Wealth Management recently published his tips, so I thought it would be appropriate to translate it for us Aussie investors. You can click here for Josh’s original article.

Here’s a trick that plays on human psychology to help us avoid making dumb mistakes, which we will no doubt regret later.

Firstly, gently remind yourself that this is exactly why people like me bang on about diversification. If however, you do not have a diversified portfolio to help absorb some of these shocks, please, don’t take any action now. It’s too late. There is nothing you can do now to absorb the shock.

There is however, one think you can do, even after the fact, that may very well mitigate poor judgement and regrettable action. Before reading on, please scroll to the bottom of this email, read my disclaimer, and scroll back up – thank you. If you did not do this, I’m essentially telling you this is NOT personal advice and I don’t even know whether these investments or strategy is right for you. This is simply an idea, a concept. Not advice.

Okay, so here we go. Log into your online trading account and click on your quoting screen. Check out the current prices for:

  1. Vanguard Australian Shares Index ETF
  2. Vanguard International Shares Index ETF

As of Tuesday, 28 June 2016, these ETF’s closed at $67.76 and $54.18 respectively

Now come up with an absurd price at which you would buy these investments. Say 15% lower? 20% lower? 25% lower? Let’s go with 20% lower. But hey, you can do whatever you want.

  1. Vanguard Australian Shares Index ETF – Closed at $67.76, now $54.21
  2. Vanguard International Shares Index ETF – Closed at $54.18, now $43.34

You get the idea.

These are prices 20% lower than what they have dropped already. Ridiculous you say? Indeed. This is the point of this exercise.

Next, go to your orders screen and place a ‘Good Till Cancelled’ buy order at these absurd prices. The order will not execute until these prices have been reached. Depending on the trading account you use, you may need to renew your order after a period of time.

The point of the exercise is to place the orders and leave them alone. Don’t adjust prices if the decline looks likes it on track, or markets begin to rise. You have a real portfolio for that, which is moving with the market.

Now that you have these absurd orders in place, something magical happens to your thought process. In fact, your mindset is completely re-arranged and you find yourself yearning for further declines. Does this make sense? No, of course not. Because you still have the rest of your portfolio that will decline in value along with it. But you’re so fixated on seeing these two investments’ prices hit, that it completely overpowers any concerns you have.

It’s like betting against your favorite footy team. Your heart wants them to win, but your mind wants the money should they lose. It’s exciting right? It even feels a little bit dirty. But getting into and changing your mindset completely distracts you from the panic that surrounds you.

Hey, imagine if the order hit. Now there’s a story to tell your mates. Not only could this be a brilliant trade, but it will serve as a reminder for the rest of your life that you’ve been through these corrections before and have come out the other end with a winner.

The Pursuit of Happiness

Pursuit of happiness

They say money can make you happier. We all work hard for our money and after spending it on regular necessities, for most people, there’s not much left over. It’s little wonder we want to make certain our limited resources are well spent.

Spend your limited resources on experiences and not ‘things’ says science. Many of us believe that buying material things will leave us happy, however, according to a recent study (Thomas Gilovich – A wonderful life: experiential consumption and the pursuit of happiness), researchers have found that experiences deliver a greater lasting degree of happiness.

Here’s why:

Adaptation

Gilovich says “we buy things to make us happy, and we succeed. But only for a while. New things are exciting to us at first, but then we adapt to them.”

We’re thrilled when we get a raise at work, or buy that new car. The thrill however fades quickly. Our raise is no doubt absorbed into our budget, often referred to as ‘lifestyle creep’, our car loses its new car smell, and soon, a thirst develops for the next ‘thing’.

Experiences however, are a much bigger part of ourselves.

Identity

“If called upon to write our memoirs, it is our experiences we would write about, not our possessions”, says Gilovich. “…our experiences collectively make up our autobiography. In a very real and meaningful sense, we are the sum total of our experiences. We are not the sum total of our possessions, however important they might be to us.”

Going out and buying the latest Android phone is unlikely to change who you are, whereas , a short trip to hike the Grampians National Park, or cycling The Peaks Challenge most likely will.

Oh the anticipation

Think about the enjoyment of your last material purchase. How did you feel leading up to the purchase? Maybe a little impatient?

Compare this to how you felt leading up to your last experiential purchase…from the moment you started planning, right through to the memories. It was probably filled with excitement and enjoyment.

Oh the disappointment

Have you ever bought something and thought to yourself, “well…that wasn’t worth it”, while it stares at you for as long as you keep it in your possession. We rarely do this with experiences.

Even the disappointing concert or the holiday that didn’t turn out as planned are quickly rationalized and accepted, “it was great to get everyone together at least”. Studies show that once people have the chance to talk about a negative experience, their assessment of that experience goes up.

Keeping up with the Jones’

Research suggests that we tend not to compare experiences in the same way as we compare material items.

In a Harvard study, when people were asked if they’d rather have a high salary that was lower than that of their peers or a low salary that was higher than that of their peers, a lot of them weren’t sure. But when they were asked the same question about the length of a holiday, most people chose a longer holiday, even though it was shorter than that of their peers.

Its difficult to quantify the relative value of any two experiences, which makes them that much more enjoyable and valuable.

Material purchases may last longer than experiences, but it’s the stories that matter the most. It’s the memories that help shape our identity. Next time you’re thinking about how to spend your limited disposable income, ask yourself what really makes you happy. After all, you’ve worked hard for your money.