We All Have Choices To Make
@soymeraki
I was asked this week, "How do you make sense of how or why the market is responding the way it is?"
When something such as COVID-19 disrupts trade and travel there is less economic activity.
When there is less economic activity there are less future earnings.
When there are less future earnings there are lower stock prices.
When there are lower stock prices an investor’s account values decrease.
When an investor’s account values decrease, investors have a choice to make.
The choice to buy, sell or hold can be an incredibly difficult one to make. This is especially true when:
There are more zeros at the end of one's account balance.
An investor with a short time horizon and a need to access funds from their accounts.
Someone worked hard to build their account balance up to $10k and now it is worth $7.4k.
The type of investor we are is determined by the decisions that we make, especially considering our current market situation. As the esteemed American Neurologist and financial author William Bernstein puts it there are three groups of investors:
Group 1: The average small investor, who does not have a coherent asset-allocation strategy and who owns a chaotic mix of mutual funds and/or individual securities, often recommended to him or her by a broker or advisor. He or she tends to buy near bull market peaks and sell near bear market troughs.
Group 2: The more sophisticated investor, who does have a reasonable-seeming asset-allocation strategy and who will buy when prices fall a bit (“buying the dips”), but who falls victim to the aircraft simulator/actual crash paradigm, loses his or her nerve, and bails when real trouble roils the markets. You may not think you belong in this group, but unless you’ve tested yourself and passed during the 2008–2009 bear market, you really can’t tell.
Group 3: Those who do have a coherent strategy and can stick to it. Three things separate this group from Group 2: first, a realistic appraisal of their true, under-fire risk tolerance; second, an allocation to risky assets low enough, or a savings rate high enough, to allow them to financially and emotionally weather a severe downturn; and third, an appreciation of market history, particularly the carnage inflicted by the 1929–1932 bear market. In other words, this elite group possesses not only patience, cash, and courage, but also the historical knowledge informing them that at several points in their investing career, all three will prove necessary. Finally, they have the foresight to plan for those eventualities.
For most who fall into Group 1 & 2, it is not the intention that prevents someone from landing in Group 3 but rather a lack of planning and/or perspective. Having perspective can make it easier to make wise decisions, especially in the midst of chaos. I don't wish to diminish what we are experiencing with "don’t worry its all going to be ok." However, as we think about COVID-19 in historical context it's hard not to witness the ongoing resiliency of mankind and our economical system. See below for how the markets have weathered the last several years (1/1/08 - 12/31/19).
Source: First Trust Advisors L.P.
There is more to be said about resiliency when we scale back to 1900. (see below)
Source: FactSet, NBER, Robert Shiller, J.P. Morgan Asset Management.
The reality is that whether your retirement timeline is near or far, most of us will be impacted in one way or another by COVID-19 and COVID-19’s impact on our global economy. We all have choices to make. If you are making decisions to protect your health look to CDC for guidance. If you are making decisions with regards to your investments, gain some perspective and talk to your financial advisor. Let us know how we can help, contact us at Human Investing or call at 503.905.3100.
“Job one for the investor, then, is to learn as best she can, to ignore the day-to-day and year-to-year speculative return in order to earn the fundamental return.” – William Bernstein
SOURCES:
Rational Expectations: Asset Allocation for Investing Adults by William Bernstein.
