Yoshikami: Trading an Insane Market
Founder and Chairman of the DWM Investment Committee at Destination Wealth Management.
The market is a forward-looking animal.
Despite difficulties today, market participants are always looking forward for the next opportunity. That's why despite the ridiculous debate about the "fiscal cliff," higher unemployment claims, a still stagnant real estate sector, and a host of other ills, the market is still trading higher. Clearly longer term trends matter. Do you think a company like McDonalds or Apple make their decisions all based on the short term? Of course not.
This is not to say that you should ignore current conditions; it is absolutely critical that you assess the current environment and factor that into your investment decision. But with the exception of short-term traders, most investors should be looking forward for future capital opportunities. Whether it is one year or five, knowing your time horizon and investing on what you believe future data will indicate is the best path for investment success.
I know this seems obvious. But if it is so obvious, why do so many investors ignore this investing truth?
It all comes down to emotion.
Is it any wonder that equity mutual fund inflows seem to go up when markets hit high levels? Likewise, when the market bottomed in 2008, is it surprising that equity outflows were huge? This contra indicator is used by sophisticated investors as a way to measure investment sentiment and we believe it is a valid data point. As Berkshire Hathaway's Warren Buffett has opined, "Sell when others are greedy and buy when others are afraid".
Simple advice as long as you are able to keep your wits about you despite panic in the world.
You have to decide if you are a short or long-term investor. And it is possible to be a little of both; we are at Destination Wealth Management and we believe it gives our clients the best chance of success in an uncertain world. You can define your philosophy as well.
Put a percentage weighting on YOUR chosen ratio between long and short term. Quantify your ratio and make a philosophical decision that you will stick to despite market noise. Making a judgment about your own philosophy and then sticking to it, is the way you minimize panic and fear. And that's really the goal as a successful investor; to reduce your emotional reactions while the world around you shrieks with delight or horror.
Be rational. Be institutional in your perspective. Make judgments and decisions not reactions. This is an important course of action as I am quite confident that the world we face will provide many opportunities for fear and euphoria. Make it your goal for 2013 to be a rational investor not a reactive one.
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Michael Yoshikami, Ph.D., CFP, is CEO, Founder and Chairman of the DWM Investment Committee at Destination Wealth Management. Michael is a CNBC Contributor and appears regularly on the network. DWM is a San Francisco Bay Area-based independent money management firm that provides fee-based wealth management services to institutions and individuals around the world. Michael was named by Barron's as one of the Top 100 Independent Financial Advisors for 2009, 2010 and 2011.