The debt ceiling and government shutdown dominated financial news 7 days a week in Nov-Dec 2013.
- Democrats and Republicans wanted to raise the debt ceiling to prevent US default.
- Both sides agreed that this was the only option to avoid a global catastrophe.
- Republicans voted against Democrats and demanded the Affordable Health Care Act be hamstrung.
- After an extended deadlock, the government shut down shut down on October 1st
- After 16 days, Republicans dropped their bluff hours before the default deadline, and the debt ceiling was raised.
With 800,000 government employees on furlough, suspended public services and the uncertainty of a timely resolution, how much do you think the stock market fell?
During the government shut down, S&P500 tracked index fund VTSAX skyrocketed from $36 to $44, a 22.2% gain in just 16 days. Does it make sense that the market would rise while 800,000 employees are on furlough, and the debt nears the ceiling?
It doesn't matter. The fact that it did implies that information I thought had value in
For young investors, the buy and hold strategy performs best in the long run. That's buy and hold, not buy and sell. If prices are high, buy. If prices are low, buy more. As long as you have money to invest, invest it. I deviated from this strategy by selling at the worst time- when people are fearful. I failed hard, and it cost me money.
What I Did Wrong
I sold stocks, fearing that prices would fall. Prices rose, however this is not why my decision was wrong. My decision was wrong because it was based on inaccurate information.
Mistake #1: Overexposure to News
News is always negatively biased, since fear sells. I was actively searching for financial news several times a day, all of which invariably discussed the consequences of a default and extended government shutdown. Because of big media's financial incentive to be negatively biased, overexposure leads to panic-based decision making.
Mistake #2: Ignoring Market Signals
Despite all the panic in the media, there was none in the markets. Sure, 4-week Treasury rates rose a little bit, but nobody was selling stocks, and most bond rates were not affected at all. The market is forward-looking and self-fulfilling: If participants predict imminent financial disaster, they will sell volatile assets and buy safe ones, causing the price of volatile assets (like stocks) to go down. In the month of October, the stock market grew steadily, signaling that the investors with the most money in the market did not see a US default as a probably outcome. They could have been wrong of course, but I had no basis to argue that default was probable.
What I Did Right
I was only uncertain enough about the future to sell my tax-protected stock. The stuff outside of IRAs I left untouched. Ironically, taxes made me richer. Thanks, Obama.
- Disconnect from doom-laden financial news
- Stick to the fundamentals of long term investing- Buy and hold for decades, not years.
- When in doubt, do nothing