Dow Closes Down 207 Points; Hold Onto Cash

On Tuesday, the Dow Jones Industrial Average closed at: 13,028.92, -207.61, -1.57%  4:30pm 08/14/2007<img alt="" border="0" src="http://www.marketwatch.com/charts/big.chart?style=1032&size=1&type=256&uf=8192&time=1dy&freq=1mi&symb=$INDU" />
29 of its 30 components fell, led by big drops in shares of Wal-Mart and Home Depot.
The S&P 500 index dropped 26 points to 1,426, and the Nasdaq Composite lost 43 points to 2,499 (<a title="MarketWatch" href="http://www.marketwatch.com/News/Story/Story.aspx?column=Market+Snapshot">MarketWatch</a>).
Meanwhile, European markets closed deep into red with national benchmarks ending the day below one percent.
<a title="Stock Market Psychology Blog" href="http://www.marketpsych.com/blog/2007/08/what-investors-can-learn-from-claude.html">Stock Market Psychology Blog</a>:
<h3>MONEY-MONET!</h3>
<a href="http://www.marketpsych.com/blog/uploaded_images/Monet-Up-Close-753533.jpg"><img alt="" border="0" src="http://www.marketpsych.com/blog/uploaded_images/Monet-Up-Close-753530.jpg" /></a>I was on CNBC on Thursday, which I enjoyed immensely. (<a title="CNBC" href="http://www.cnbc.com/id/15840232?video=461408209">Clip here</a>). They wanted a “shrink” to provide commentary of the current market psychology. We know people are jittery these days. How could they not be? But we also know that panic costs people money big time. So how do you get back to the proper perspective? 
Well, start by checking out the picture above. What does it look like to you? If your answer is “not much”, than you have something in common with the vast number of investors viewing the market’s behavior the past couple of weeks. 
The photo above is a painting by Claude Monet. Monet was the founder of a new style of painting, French Impressionism. The style is marked by, among other things, “open composition” and “visible brushstrokes”. What that translates into (apparently) is “make a bunch of dots and the dots become a picture.” 
Here’s the thing to remember: A portfolio is like a Monet. If you get too close to a Monet, all you see is a bunch of dots (a phenomenon comically illustrated in the movie Ferris Bueller’s Day Off when he goes to the art museum). The same is true with our portfolios. When we get too close, we see nothing but a bunch of dots. It’s data devoid of context. The picture makes no sense, and when it comes to our investments, that’s scary. 
The key to appreciating a Monet or a portfolio is viewing it from the right distance. 
<img alt="" border="0" src="http://www.marketpsych.com/blog/uploaded_images/Monet-744663.jpg" /> (Waterlillies)This means resisting the constant pull to look at our investments from a weekly… daily… (minutely?) framework. If you look at a chart of the past month, it will provide a frighteningly volatile picture of big ups and bigger downs that may induce a feeling of motion sickness. If you look at a chart of the past 20 years, it is much more likely to produce what Glenn Frey would call a “peaceful, easy feeling”. Volatility is not the same thing as risk, if you have the right time horizon. Perspective is everything. 
I’m speaking of course not only about the distance of time, but of emotional distance as well. When we get “too close” emotionally to our portfolios the result is the same. This is one reason why working with a financial advisor (orr failing that, an investing confidante) can be so valuable. Sometimes we need someone to tell us, “Take a step back”.
Like <a title="Wikipedia" href="http://http//en.wikipedia.org/wiki/Sissyphus">Sisyfus</a> rolling his stone up the hill in Hades or me organizing my desk, it is a neverending battle because, as humans, we are constantly, unconsciously and inexorably and being drawn into a short-term focus. (It’s happening right now. Seriously. It is.) That’s the side effect of paying attention to our world and we can’t help it. But if we can make ourselves aware of it, and that gives us a fighting chance. 
How do you keep yourself aware?: Reminders. Whatever works best for you. One option would be to get yourself a Monet print to hang in your office. They’re cheap, they’re easy to find, and they make a nice reminder of how we can’t appreciate our portfolios if we don’t have the proper distance. 
Plus people at work will think you’re “classy”. Which is nice.”

Leave Your Comments Cancel reply