Markets are What You Make of Them

“Life is what you make it,” a phrase every person hears at some point in their life. The appeal of this popular proverb is its universal applicability to every situation we encounter throughout our lives. Its closely related cousin, “When life gives you lemons, make lemonade” conveys the same sentiment, but is clearly directing our attention to the unfavorable circumstances every person is bound to experience, including those involving personal finances. When dealing with issues specific to this aspect of life, the markets truly are what you make of them.

The last few weeks have been a stark reminder of how quickly markets can turn. Does our financial prosperity teeter on the actions of foreign governments, perceptions of geopolitical uncertainty, and the words of those tasked with overseeing the stability of our complex financial system? Like a boat riding the peaks and troughs of ocean waves, investors must stick to the plotted course to reach the desired destination.

When a broad market sell-off occurs, smart investors will see this as an opportunity to first evaluate existing weaknesses in their positions, and then identify and acquire securities they believe to be undervalued. Especially for portfolios that are built around the herd mentality of index funds, pullbacks are the optimal time to compare one’s passive investments to funds that did not experience significant losses when the market retreated. There is no harm looking, you may even find a diamond in the rough.

An easy way to take advantage of sell-offs, and invest any excess cash is simply to increase exposure to existing holdings. This is especially true for investors who are able to take on more risk. If you are truly confident your portfolio is crafted for long-term growth, why not add more at a lower price?  The implicit assumption made when investing for growth is the investor believes their equities have not peaked in value and will not do so for quite some time. You are likely planning on holding many of the positions in your portfolio for a significant period of time and buying after a sell-off is an easy way to lower one’s average price.

Perception is reality. Smart investors see pullbacks as a valuable opportunity to reevaluate their positions and see if they are taking on more risk than they had previously thought. They also use it to squeeze better returns out of long-term positions. The markets are what you make of them.

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