You are sitting in your nice, new, comfortable home. You purchased it intending to live there indefinitely which, given your health, you figure is several decades.
Just as you are taking it all in, you hear a knock at the front door.
Opening the door, you see someone looking rather stressed and bedraggled.
“Yes?” you say cautiously. Your unexpected visitor announces, “I’m your neighbour. I just wanted you to know that I’m willing to buy your house today for 60% of what you just paid for it…”
You quickly interject, “Uhhh… no thanks,” and you close the door… firmly.
Unfortunately for you, day after day, that same neighbour shows up to tell you how much he’s willing to pay for your house. On most days you manage to ignore him. But he seems to shout the loudest when his price is either really high or really low compared to the price you paid.
Most of us would call the police on such an annoying neighbour. However, we can’t call the police on the news outlets that constantly tell us what the market is willing to pay us for our portfolio. But it can be just as annoying.
Similar to buying a house, most people purchase an investment portfolio to provide them with a lifetime of benefits. Despite that very long time horizon, we are exposed, on almost a daily basis, to information about what the market is willing to pay us if we decided to sell out today.
But here’s the rub, we’re not selling out our entire portfolio today, we’re not selling out tomorrow and, in fact, we’re not selling out for the rest of our lives if we can help it.
Selling out now is counterintuitive anyway. When our noisy neighbour offers us a low price for our house, we ignore him. But when offered a low price for an investment portfolio, people can surprisingly react quite differently. The reason they might act differently is usually a combination of fear and uncertainty.
But the ironic part is that many investors feel compelled to sell out just because someone is willing to pay them less than they paid for the same portfolio.
There may not be a worse reason to sell than simply for the reason that someone will pay you less than you paid for the same thing. This is especially true when history tells us that diversified portfolios have always recovered, every single time.
In the long term, selling assets at lower prices than you paid for them is not a profitable strategy. If you were a trader, it would be a fast track to the poor house. It’s an especially bad idea to sell long term investment assets just because daily prices may have fallen, because history tells us that in previous difficult markets, diversified portfolios have always recovered. Every single time.
You might say, but I’ve lost money and I need to sell while I still can. But the reality is, you only “lose” when you do sell and crystallise the loss. Until then, it’s just another crazy price proposal being put forward by your noisy neighbour, Mr Market.
If instead we could view our portfolio like a house which we fully intend live in for decades, perhaps we could treat the daily market noise like an annoying neighbour, one which we are only too happy to ignore.