Investing Club: In rocky markets, follow your investment strategy—not your gut

Published Fri, Feb 18 20224:15 PM ESTUpdated Thu, Mar 24 20229:48 AM EDT

It was a nasty week for the markets. The major averages remained under pressure on fears Russia will soon invade Ukraine, with the Dow posting its second losing week in a row. In times like this it can be tempting to trade the headlines—be they geopolitical, macroeconomic, environmental or something else entirely. But we would argue this is a temptation to fight. Of course, that's easier said than done. While trading is certainly difficult, it's even harder to do nothing, sit on your hands and stick to your investment strategy of focusing on the long term fundamentals. Too many things have to go right to be successful to trade on the news. You must figure out the connection between the current headline and a trading vehicle that appropriately expresses the fallout — a Herculean task given the constantly changing news cycle. Add to that, the more moves you make, the more you have to be right. In a no-called-strike game where it's hard enough to hit the perfect pitch, the difficulty only increases when you are telling yourself that you must chase every pitch. Hedge funds may need to play that game, but long-term investors with no leverage have the luxury of sitting back and letting these events play out while focusing purely on the fundamentals of their investment. This is of course within the context of maintaining a well-diversified portfolio built on strong underlying business fundamentals and focus on valuations. Unless the headline of the day, week, or month impacts the long-term growth potential of our investment, we should not be altering our investing strategy and going against our discipline. In our case, that means to buy weakness in the stocks of great companies that are sold off on unrelated, external dynamics. As we've said before , these moves, to the long-term investor, should be viewed more as opportunity than risk— though of course, as we discussed in our Morning Meeting on Friday, we do want to space out our buys so as not be continually buying at the same level. That's not to say some hedging, or a cash raise, is not in order from time to time — that's just good portfolio management. You will often see us increase our cash levels as a means of hedging volatility. However, you should not alter your long-term strategy based on the day to day news flow. Perhaps during times of heightened volatility you choose to reduce equity exposure to the lower range of a designated band. That is something that should be contemplated ahead of time and may be appropriate depending on your own unique risk profile and investment horizon. But if, for example, you have never traded commodity futures, then dropping your previously outlined plan and liquidating your holdings to jump into that investment idea is a mistake—even if recommended by a so-called expert. You can't compete with the professional traders or trading algos that increasingly dictate the day-to-day action. It's hard enough to stick with a trade or investment once it goes against but it's even harder if that conviction was never yours to begin with. The desire to trade the news often becomes greater in volatile markets, because that's often the exact environment where emotion tries to take control. The last thing we want in the moment of market turmoil is for our emotions, rather than our investment discipline, to dictate our actions. (See here for a full list of the stocks in Jim Cramer's Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

U.S. Soldiers stand in front of the U.S. Air Force Boeing C-17 Globemaster III as it delivers equipment for planned NATO 'Saber Strike 2022' exercises at the air base in Malacky, Slovakia February 17, 2022.

Jiri Skacel | Reuters

It was a nasty week for the markets. The major averages remained under pressure on fears Russia will soon invade Ukraine, with the Dow posting its second losing week in a row.