Chances are you have heard The First Rule of Holes: when you find yourself in a hole, stop digging. The principle bears repeating. Even if we didn’t create the problems we face, we often make matters worse than they should be.
With three months left in 2012, investment fund managers begin to look in earnest at their performance relative to their peers, which is how most of them are evaluated. To start the year, managers rode a steady move up in stocks through April–only to see the gains in the major indexes wiped out in a May swoon that lopped 8.5 percent off the S&P 500. As the country sweltered under an historic summer heat wave, investment fund managers felt heat from of a poorly received Facebook IPO (initial public offering), double-dip recessions in foreign economies and the uncertainty of a closely contested U.S. presidential election here.
Now that Bernanke and the Federal Reserve announced the monthly purchase of $40 billion of mortgage bonds, and Apple has sold millions of new iphones, the stock market has rallied 12 percent from the June lows.
This presents a problem for stock investors trying to find a re-entry point after selling out in May. With returns trailing their peers and time running out to catch up, they are faced with the gut-wrenching choice between buying now and hoping prices keep moving higher or waiting for markets to pull back in the fall like they did in 2011.
This problem is a symptom of a broken process. Somewhere along the line, these managers strayed from cogent decision making and let greed or fear hijack their process. My firm maintains client portfolios based on ongoing research of economic data, market valuations, the individual investments we select and each client’s risk profile. This process helps us maintain a prudent risk profile and avoid the pitfalls of market timing or “digging a hole.”
The moral of my story: regardless of the origins or circumstance of your problems, don’t make them worse by your own actions. Stop digging.