Situational Awareness of Markets

I follow you around but you can't see
You're too wrapped up in yourself to notice
--Madonna

An important factor in making sound investment decisions is situational awareness about markets. Generally speaking, situational awareness is a state of knowledge and sensitivity about the environment that you're operating in. People with high situational awareness perceive critical forces at work around them, understand their meaning, and project what can happen to a system in the future.

Stated differently, the more you know about the surroundings that you're operating in, then the better you'll be able to operate.

Situational awareness starts with understanding important concepts and their relationships in a decision-making domain. In the investment domain, we've considered many core market concepts over the past few months.

Once you've grasped concepts, you have to put them to work. By this I mean observing what goes on routinely in the socio-economic reality of markets--the happenings that bring concepts to life. The more you immerse yourself in the flow of events, the more situational awareness you'll gain.

Here are some ideas for developing greater situational awareness of markets:

Start with a watchlist. Apps abound that enable you to create lists of stocks, bonds, commodities, indexes, et al. whose prices you want to track. Because prices are a central expression of market behavior, understanding price levels and trends is an effective way to elevate situational awareness of markets. Watchlist apps often include charting capabilities as well as relevant headlines. My favorite watchlist app came with my iPhone. I usually roll through my watchlist at least once/day.

Review the news flow. In the dark ages prior to the internet, staying apprised of business and market headlines took some doing. I would spend hours scouring daily newspapers like the Wall Street Journal and Investor's Business Daily plus weekly magazines like Business Week and Fortune to stay apprised of events. Cable TV stations that catered to investors, such as CNBC, Fox Business, and Bloomberg, subsequently added to the process of assimilating information. Today, these media outlets, alongside many others, operate websites that stream news flow 24/7 to the convenience of investors. My recommendation is to locate a source or two that you like, and then visit regularly. Over time, you'll be stunned at how much situational awareness you'll acquire by 'osmosis.'

Keep tabs of your personal financial situation. What is your current asset allocation? What stock positions are you holding? How much dividend income are you collecting on an annual basis? How much cash have you set aside to fund life's expenses? Good situational awareness of markets requires that you are aware of your own financial situation! Establish a routine where you review your financial situation regularly. You might start with account web pages or statements generated by your broker or bank. To make the process active rather than passive, consider setting up spreadsheets that require you to plug in up-to-date data regarding your accounts. You might also consider a spreadsheet that aggregates information across accounts so that you can estimate overall asset allocation.

As your situational awareness of markets improves, so will the quality of your investment decisions.