The anticipation in Cleveland is at a fevered pitch. Every basketball fan is refreshing twitter, listening to sports talk radio, and tuning into ESPN to find out the latest scoop. Akron’s prodigal son, LeBron James, opted out of his contract with Miami and is deciding on whether he should return to the Cleveland Cavaliers where he started his career. It is not every day that a top 10 all-time player changes team, but coming home to the Akron-Cleveland area would be redemption for leaving four years ago. Billions of dollars hang in the balance for the players, organizations, sponsors, and fans. Many other players are free agents and waiting along with the teams to see who will go where, but only after LeBron decides.
Do you think these teams have a backup plan if things do not go as planned? Of course they do. There is too much at stake not to have a Plan A, Plan B, or Plan C if one free agent goes to Houston and another goes to Chicago. Billion dollar organizations do not ‘wing it,’ nor do the top investors.
It is clear that some investors do not have a plan if the stock market falls or interest rates rise causing bond prices to fall. Why? Because weak prices beget more selling as it did with the stock market’s 50% drop in 2000-2002 and in 2008. The times when the biggest cash inflows should have taken place for rational decision makers was actually when the biggest outflows occurred from equity mutual funds.
Humans cannot help but revert to a protective mindset when their resources are threatened. The resources, namely financial assets consisting of stocks and bonds, decreasing in prices threatens future consumption. Wanting to minimize the likelihood of further losses, investors react to falling prices by selling. This is seen across asset classes, such as in bonds last year when interest rates rose, and across regions, as in the depth of the European crisis in 2010-12, investors pulled money out of the German, Greek, and Italian stock markets.
Having a plan for adding funds to stock and bond positions is a must for price weakness, along with selling contingencies as prices increase. This must occur before the event, to prevent irrational decision making. It is a dynamic and ongoing process of planning to achieve consistent investment results.
The Cavs have All-Star point guard Kyrie Irving and #1 overall pick Andrew Wiggins along with room to sign another free agent, though we are all hoping Plan A of signing LeBron goes as planned. Hopefully the other teams have to worry about Plans B & C.
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