Every hockey professional knows the value of having a plan in place when it comes to the game of hockey. Whether it’s a player with a summer training program or a coach with a team’s season plan, having a plan in place before a game, series or season is valuable and provides an action plan you can use during a moment when emotions could take over. Unchecked, these emotional reactions can derail a player or team’s momentum and a small hiccup can become a much bigger problem that can spiral out of control and upend an entire hockey game, season, or career.
In investing, like hockey, a pre-game plan keeps you on target
Investing successfully in the stock market has similar emotional landmines. An investor’s psychology can potentially derail their wealth plans more than any other factor. Forgetting the investment plan and reacting emotionally to changes in the market will leave a player with far less wealth due to poor investment decisions at the worst possible times. This is particularly painful for hockey professionals where their “earnings window” (the time period when they are earning an above-average income) is relatively short compared with other professions: their ability to “earn their way” out of emotional mistakes is not as great. When the hockey career ends, the money ends, so every dollar must be mindfully managed. In comparison, a person with a more traditional income can make some mistakes and perhaps work longer or delay retirement in order to make up the loss—not the ideal scenario, but there’s sometimes decades more income for them to work with.
Poor investment decisions during frightening economic times are usually two-fold:
-making an emotional decision and selling their equity positions;
-and moving to cash near the bottom of the market, essentially at the worst possible time.
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These two common errors can be further compounded by another decision: keeping the sale proceeds in cash to be “safe” and not risk further losses. Not only does this “lock in” losses in their investments, but it also eliminates the opportunity for the investments to recover in value when the economy or investment landscape improves.
These poor investment decisions would be like a hockey team starting an important playoff game by pulling their own goalie at the opening faceoff because they happen to be down in a playoff series. It’s done at the worst possible time, and one bad decision has implications far beyond that particular game. It’s the same for investments as “hiding in cash” eliminates the opportunity for the investments to recover and compound in value over the coming years.
One caveat to keep in mind is that the investor must understand what investments they own in the first place. Quality of the investment is critical. There is no law of investing where “what goes down must come up”. The potential recovery of an investment depends upon that investment’s intrinsic value (what the investment is actually worth to an investor) rather than a fleeting value based upon a speculator’s viewpoint.
Like any hockey game, the marketplace can change on a dime
When approaching any investment, any investor should realize that the market value of that investment will change over time and changes could come rapidly without warning (for example as witnessed at the onset of COVID in early 2020). In fact, going back to 1980 and covering a span of 32 years, the average intra-year decline of the S&P 500 was -14.0% but annual returns were positive in 32 of those 42 years.[1] Clearly investors need to expect some volatility over the course of the year.
Some final tips for hockey professionals who may be spooked during this downturn:
- Know what investments you own and why you own them. Stick to owning quality companies that have a better-than-average chance of recovering when the investing landscape and economy improves.
- Do not commit new money to investments if you will need that money within at least two years. This allows enough time for markets to stabilize and your quality companies to navigate any short-term economic challenges.
- Have an investing plan that details how much you have in equities and other assets. Stick to that plan even when (and especially when) markets are volatile.
As Ben Graham said: “In the short-run, the market is a voting machine — reflecting a voter-registration test that requires only money, not intelligence or emotional stability — but in the long-run, the market is a weighing machine.” – Warren Buffett, 1994 Annual Letter to Shareholders of Berkshire Hathaway
[1] JP Morgan Asset Management “Guide to the Markets”; page 16; July 31, 2022
