How NOT to Make Important Investment Decisions (and 8 Surprising Ways Some Investors Do)!
There are people, animals, and all sorts of wild superstitions that folks rely on to help them predict some of life’s biggest outcomes.
There’s Punxsutawney Phil, the most famous groundhog, who has been asked to predict either a continued winter or early spring since the 1880s — and he’s been right only about 40% of the time.
Let’s not forget the heaps of theories for pregnant women based on foot temperature or the way your pillow faces geographically to postulate whether you’re having a boy versus a girl.
And then there are seals from a Connecticut aquarium who correctly predicted four of the past five Super Bowl winners prior to this year’s game. Yep, seals (not the Navy kind—the slippery, whiskered ones).
But surely, investors aren’t relying on such notions when it comes to decisions regarding their wealth. Right? Well, it might surprise you to know that this does, in fact, happen.
We love some good old-fashioned humor around here, so we’ve compiled this list of 8 ridiculous ways some investors make investment decisions and how you can make some wise ones.
Surprising Investment Indicator #1: Men’s Underwear
This is not a joke. Alan Greenspan, the former head of the Federal Reserve, actually gives merit to this one. The theory here is that men’s underwear sales are generally fairly stable, so when there is a slowdown in the “Men’s Underwear Index” it indicates that consumers are truly feeling the pinch and there could be troubling times ahead.
Surprising Investment Indicator #2: Lipstick
This one is based on the thought that during tough economic times, consumers may pause their spending on large luxury items but will still spend their money on expensive lipstick. So, investors look to this “index” to guide investing decisions into areas that benefit from spending on “limited luxuries.” The pandemic, however, put a dent in the pattern of the lipstick indicator when times were economically tough, but nobody was buying lipstick because we weren’t going anywhere and, if we did, we were wearing masks.
Surprising Investment Indicator #3: The Super Bowl
This theory believes that when an NFC team wins, the stock market will rise, and if an AFC team wins…watch out markets! If that were true, the stock market should be in for a rise thanks to the Los Angeles Rams’ victory in February.
Surprising Investment Indicator #4: Online Dating
The data on this is fairly limited as dating sites themselves do not go back for an especially long period of time. Supposedly, when unemployment is high, an increase in dating site traffic will follow.
Surprising Investment Indicator #5: Emotion
“My father worked there,” “My parents held this stock,” or some version of that. An investor takes a decision about buying or selling stocks that should be unemotional and makes it emotion-based. This is very common and especially difficult because investors then struggle to determine at what point the position can be sold. An exit strategy is then not clear at all. Always know what you own, why you own it, and what benefit it has to your portfolio.
Surprising Investment Indicator #6: Sports Illustrated Cover Model
This theory suggests that if the cover model for the Sports Illustrated Swimsuit Edition is from the USA, the S&P 500 will do well, and if an international model graces the cover, it will lag.
Surprising Investment Indicator #7: Keep Buying Losers
This isn’t an index, but more a way of investing that individual stock pickers are often susceptible to. It might sound sensible to sell winners and buy more losers since sell-high, buy-low does have merit. But when this theory is applied to individual stocks, it doesn’t stand up. If you own an individual stock that consistently loses value, you might simply have yourself a loser!
Surprising Investment Indicator #8: Rotisserie Chicken
A standard measure of inflation tracks the price of a Costco rotisserie chicken, then predicts that Fed interest rate decisions will correlate. OK, this one isn’t an index at all. I completely made it up, but it sounds good at first glance, right? (Despite the fact that Costco has apparently committed to selling their chickens at $4.99 for the foreseeable future as a known loss-leader to attract customers!). Costco is a known for doing this regularly to attract customers. Let this be a lesson to you!
Any one of these indexes or methodologies can have its moment in the sun and can seem to provide a pattern. However, there are also just as many that eventually fall by the wayside and prove themselves not worth following.
How to Make Sound Investment Decisions
While the above ridiculous investment reasons can be funny and fun to follow, you should make ACTUAL sound investing decisions based on:
- Your unique financial situation
No one situation is exactly the same as the next, which is why listening to the advice of friends or neighbors isn’t usually the best course of action. Your advisor, on the other hand, should be well-versed in all your financials and can help you decide the best game plan for your investments.
- Your individual risk tolerance
It’s easy to feel confident when the market is riding high, but that confidence can waver when the market makes sudden moves in either direction. The goal through highs and lows will be to stay true to your risk tolerance level, which will be highly dependent on how close you are to achieving a certain financial goal. With that timeline in mind, you can decide how to counteract potential headwinds that could derail those plans in the interim.
- Your long-term goals
The market will always move up or down. The key is to allow the more volatile components of a portfolio the space to grow or to recover from a downturn while being positioned to take advantage of upside potential. Focus on the long-term goals, not the short-term movements in the market.
- Keeping emotions in check
Unfortunately, it's common for investors to give in to fear during market downturns or to fall prey to exuberance during market upswings. When things look ominous, investors prematurely sell their investments at rock-bottom prices; when the market is riding high, investors tend to want to go "all in." Both of these moves can negatively impact your portfolio returns and recovery potential. One of the most valuable attributes of an advisor is helping clients stick to their long-term investment strategy when they feel the impulse to buy or sell at the wrong times.
- Trust Your Portfolio Allocation Suits Your Needs
Do not let the euphoria of rising markets drift you to a more aggressive allocation. And, as we see today, do not let downturns shift you to make temporary losses permanent by selling. Remember, no losses are actually realized until you sell. Hang in there and wait for the market’s best rebound days to bring you to new heights.
Long-term, Not Lancome
Constantly checking the price of lipstick (or men’s underwear) DOES NOT a sound investment decision make. Overall, it's imperative to remember that volatility is common, and we can’t predict either way how the market will react to the latest macro and micro events worldwide. You can prepare for ups and downs by controlling what is in your control: your behavior, investment diversification, tax exposure, and investment costs. Combined, these components can positively impact returns and the subsequent sustainability of your portfolio.