SCOTT REED: Know what investment cycle you’re in and act

By Scott Reed

The Dow Jones Industrial Average topped out at just over 15,500 in the second quarter of this year. We have been waiting for a big move in the equity markets for quite some time, and it was satisfying to see investors start to feel good about their financial life again.
The problem with being in this business as a professional is that we can’t ever seem to be too happy.
When the markets are down, we see a buying opportunity while our clients see the fall of their personal financial empire. When the markets are up, we see a chance to take some profits while our clients see investments that could go higher and higher. It can get pretty confusing at times.
I have said for a couple of months now that we should see a decline in the stock market somewhere around the 10 percent range in the not-too-distant future. Maybe this is it.
We have backed off of our previous high by about 6.5 percent so far in the past week. Will the equity markets go back up from here? Could be. Will they go down some more? That’s a possibility as well.
The next comment out of many of your mouths should be, “Well, you don’t know much, do you?”
That may be accurate, but I do know a few things that can help you plan for your financial future.
First, short-term moves in the markets have little to do with economics and much to do with investor behavior. The reason I have been confident that the equity markets would go down is not because I know something about the Fed’s next move, housing starts or unemployment numbers. It is because I know something about history and human behavior.
When markets go up and people make money, at some point some of those people will want to take their newly earned money and go home. That is just a fact.
Historically, moves like that tend to peter out after around 10 percent unless current conditions force investors to be more fearful or more greedy than normal.
Nothing goes in a straight line in the real world other than a straight line. Markets bounce all over the place in the short run and smooth out over time.
It also is important to remember that market moves of any kind are both good and bad for investors depending on where they are in their investment cycle.
Take retirement plan participants, for instance. This recent downturn is good for young participants who won’t need their money for 30 years because the cheaper the price of the market, the better the investment.
Participants in their 40s and 50s are in the middle of their cycle and should like this recent downturn as long as it doesn’t go too far for too long. And if you are currently using your retirement plan funds to live on, downturns like these can be worrisome.
Emotions make it hard to do the right thing with your investments. It helps a lot to know what part of the investment cycle you are in and understand how you are supposed to act depending on where you are.
Scott Reed is CEO of investment advisory firm Hardy Reed in Tupelo. Contact him at (662) 823-4722 or sreed@hardyreed.com.