What This Year’s Kentucky Derby Can Teach You About Your Investment Strategy
The first Saturday in May is always an exciting time in the Bluegrass state. With the pageantry of derby hats, colorful ensembles, spring flowers and the singing of “My Ol’ Kentucky Home” culminating in the run for the roses, you know you’re in for a wild ride! The running of the Kentucky Derby has been named the most exciting two minutes in sports, and that certainly was true of the most recent race.
This 145th running of the Kentucky Derby saw what at first glance seemed to be nothing more than the expected outcome as we watched the favorite horse, Maximum Security, cross the finish line first in what could be described as an easy win. However, soon enough we learned that this victory was going to be negated because of a rule infraction. This was the first time in history that the horse that crossed the finish line first wasn’t garnered with the blanket of roses, creating much disappointment for many bettors who thought they were cashing their winning ticket!
The problem? Though Maximum Security did indeed cross the finish line first, he was later disqualified due to a lane violation — basically, the thoroughbred shifted sideways slightly while running down the final leg and allegedly impeded the runners behind him. This ruling was not only unusual, but it was also down-right unprecedented and is still an active discussion. Due to this disqualification, Country House, a 65-1 longshot who was running second, was declared the winner.
You can probably imagine what it was like, not only at Churchill Downs but all over the country as thousands of people celebrated their win, only to see their elation turn quickly to sadness, anger, and frustration. What they thought was a sure thing instead ended up being a bust, and the money they thought they had in hand went up in smoke.
Meanwhile, those who had taken a chance on Country House all of a sudden found themselves in the enviable position of holding a winning ticket – and one worth a lot of money.
What the Derby Teaches Us about the Markets & Investment Strategy
This experience is much like navigating the markets. As we are in the midst of corporate earnings being disclosed and economic data being critiqued, there is that period of jubilation when the market reacts positively, but disappointment typically ensues as we get a negative effect from unexpected news. A tweet from President Trump about the trade tariffs, the latest news about Brexit or a report that doesn’t meet projections are all events that show just how volatile the markets can be.
When investors try to discern the success of their investments based on the short-term direction of stock prices, they will usually be disappointed. That’s why we take a long-term planning approach to help our clients have success. We don’t focus on short-term “wins” only to be disappointed when news erases those gains. Instead, we drive portfolios to help achieve client goals.
Navigating Unpredictable Times
So, what can we do when the markets change without warning? Navigating unpredictable times is not a task for the inexperienced or faint of heart — but there are things investors can do to help weather the storm and come out ahead on the other side.
Keep it Diversified
You’ve probably been told this many, many times before — in fact, it’s basically Commandment #1 in any investor’s rule book: diversify your assets. While this is sound advice even when everything is trending upwards; it’s practically Gospel when the market is in flux. Because it’s hard to determine what the various markets are going to do in any given period, keeping all of your wealth in only one area is about the worst thing you can do. With diversification, you may have some assets going down, but you’ll most likely have others staying steady or even going up, minimizing your losses overall and letting you breathe a little easier, even when things are unpredictable.
Change Your Mentality
Here’s the dirty secret most investors won’t tell you: the markets are usually crazy. It is not entirely dependent on what’s going on in the news. True, tweets and Brexit scenarios make things go wobbly for a time, but anyone who has been in the game for a while will tell you that really the only thing predictable about the market is its unpredictability. There will commonly be wide swings and causes for panic — followed by times of gain and growth. This is why adopting a long-term outlook is crucial not only for your wealth but also for your health.
Avoid the Trends
Inexperienced investors often get into the market because there’s a stock that’s making the news. The Facebook IPO brought in many people who had never really taken the time to learn how the market works; they simply followed the news.
Unfortunately, that’s how many investors work. When a stock starts to make headlines, they jump on the bandwagon and go all in. Why not? If that stock is making money, wouldn’t it be foolish to ignore it?
There are some problems with this. The first is that, by the time that stock makes the news, its price has already increased tremendously. Those that got in on the ground floor have made their money from this stock, but everyone coming in later is not necessarily so lucky. These stocks can’t rise forever, and it’s only a matter of time before a correction occurs.
This is where the second problem comes into play. History shows these same investors, once they’re all in on a stock, refuse to sell when the stock levels off and starts to correct itself — and at some point, it probably will. It’s hard for even the most experienced of us to recognize when this sort of correction is about to occur. So, they hold on to it longer than they should, resulting in a situation where they’ve bought high and sold low. As you know, this is not exactly the way to make money on the markets.
Keep Some Assets Liquid
Here’s another piece of good advice that seems to always be on point, no matter how the markets are performing: always have cash on hand. Many investors see a bull market and decide to go all in, assuming that the more they put in, the more they’ll get in return. This may be true — if you’re lucky — but the reality is there’s just as good a chance you’ll lose, and the more you put in, the more you’ll lose.
Keeping a little cash on hand is your safety net; it’s the reassurance that even if you lose on the market, you’ll still have enough money left over to cover your necessary expenses and stay afloat.
Celebrate Those Longshots, but Don’t Be Afraid to Sell
Along the way, there’s every chance that, just like those who bet on Country House, a stock in your portfolio is going to surpass your expectations wildly. When you find yourself holding onto a winning ticket like this, enjoy the ride. This is where every investor wants to find themselves one day: holding onto a stock that’s on a meteoric rise. When that happens, all you can do is keep an eye out for that inevitable slowdown and correction. It’s not a question of if it will happen, but when. This is where experience and long-term planning come into play. Can you sell at the right time? Or are you going to hold onto that stock out of some sentimentality or fear of losing a good thing?
Don’t Panic!
In these uncertain times, the main thing to remember is this: while the market may fluctuate from day to day, month to month and even year to year, the long-term trends of markets worldwide has always been up. Even when there are huge crashes and corrections — such as what we saw in 2008 — businesses recover and markets bounce back. Those who are hoping to get in the market and get out shortly after with a big pile of cash simply don’t understand that the markets demand patience and a long-term strategy that will eventually pay off. The keys of this strategy are to make sure you’re ready when it’s time, and that you don’t bail early due to cold feet or market fatigue.
Contact Us Today
At Gratz Park, we want to help you live your best life with a plan to organize, grow, and preserve your wealth. The market today is as unpredictable as the Kentucky Derby. In times like these, you need an experienced advisor on your side giving you solid advice so that your financial plan and outcomes are more transparent, life is more straightforward, and we can take time to “smell the roses!”