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Market’s collective conscience fascinating — and fickle

The collective conscience of the market is an interesting and fickle thing. You can’t tell when it will react violently or when it will just stroll quietly through another day. Take the volatility in the market over the past few weeks.

Professional pendants in the industry have been calling for a 10% correction in the market for quite some time. We haven’t had a 10% correction in over four years and it was certainly time. The trick is trying to figure out what will cause the collective conscience to pull the trigger that will start the decline. It’s anyone’s guess and it is virtually impossible to see it in advance. That’s why the financial media spends so much time analyzing what has happened. Even the collective conscience doesn’t know what it is going to do before it happens. It just happens.

This recent decline in the markets was blamed on the problems in the sub-prime lending market. There is no doubt that those concerns are real, but in reality we have been talking about problems in the lending markets, including the sub-prime market for months and months. This isn’t something that just hit the press. It just so happens that one particular day a few weeks ago the collective conscience decided to react in a big way. The fact is that many investors have been worried about the market for a while and have been waiting for something to react to. So when the subprime story resurfaced and the market started down, the domino effect took over and we had the 10% correction that we were looking for.

Now everyone is worried about the recent volatility in the market and what that means for investors. It is a futile effort in my view to try and figure out the short-term movements of the market. The important take-away from the recent movement in the market is that it is business as usual. I know that doesn’t give the media much to talk about. Business as usual isn’t sexy. It’s much more impressive to pull up your account every day and see how much you have made or lost in this volatile period. However, I don’t recommend doing that.

I like a statement a client of mine made earlier this month. He said, “I have learned how to take the volatility out of my investments. Do you want to know how I do it?” I, of course, said, “Sure.” And he said, “I just quit looking at my portfolio every day.”

That’s the way to do it. Just quit watching it move every day. Of course, that doesn’t work for day traders or anyone else who is in it for the very short term. But most of us have long-term goals for our investments. That’s why it seems crazy to me that so many investors are willing to use short-term information to make long-term decisions. Reacting to the recent fluctuation in the market would certainly be one of those times. The fluctuation might seem to be big but the market is doing exactly what it is supposed to be doing. That’s not to say that some information may come out tomorrow that will change us from business as usual to something that warrants action, but so far it’s just the result of an efficient market doing its thing. The longer the time frame you use, the more sense the market makes.

The collective conscience of the securities markets does not care if what it does makes economic sense or any sense at all for that matter. It is just the result of collective action. So don’t be lured in by its siren song. Make your decisions based on facts and how those facts relate to your long-term plans.


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