That Darn Lucy
Poor Charlie Brown. Just as he’s gearing up for a big game, his hopes for a smooth kickoff are dashed when Lucy pulls the football away. With apologies to Robert Burns, the best laid plans of mice and men don’t always come to fruition.
Unpleasant surprises can happen in any part of our lives, including our investments. After nearly nine years of largely positive market returns, it’s tempting to believe that great performance will continue indefinitely. It’s easy to forget that markets, like Lucy, may promise one thing but deliver another. In fact, downturns are a normal part of investing, a healthy part of the process. Since they occur every couple of years on average, it shouldn’t be surprising that we’re experiencing turmoil right now. Here’s a chart from the Vanguard Group illustrating the bull/bear market history since 1980:
I’ve been helping people with their investment and other financial planning decisions for nearly thirty years. One thing I hear from time-to-time is that investing in stocks is too risky. Right now, proponents of that view are pointing toward the headlines to make their case. Yet, if you look back to the beginning of the bull market in 2008, you’ll see that only a fraction of the last nine years’ gains have been taken back. While the potential for market risk will always exist, I believe that it’s possible to anticipate, and perhaps minimize it, through various portfolio strategies.
It may be tempting to simply ‘sit things out’ when times are uncertain. I’m sure Charlie Brown contemplates it every fall. Yet he knows that if he remains on the sidelines, he forfeits the whole season, giving up the opportunity for even a single win. Similarly, when markets become more volatile, some investors decide to withdraw ‘until things calm down’. While I hear that approach suggested regularly, I don’t think the facts support it either. Here’s another chart from Vanguard:
Since the best and worst trading days often happen in close proximity, there’s no way to get out of the market without the risk of missing the next rebound. Those who consider this strategy soon learn that it requires answering two difficult questions. First – is this the beginning of a bear market or simply another correction? And second – if this is the time to sell, when will it be time to buy back in? Many of those who sold during the 2007/08 bear market are still waiting to reinvest and have missed most of a nine-year bull market.
Please allow me to repeat a comment I’ve made before. The rational Warren understands all of this and believes that markets will continue to rise in value over long periods of time. But the human Warren is just as afraid as anyone else during corrections. How do I try to calm myself? I turn to research from partners like the American Institute of Economic Research. It publishes a monthly update which evaluates dozens of indicators to forecast the likelihood of a recession in the near future. Not that a market correction can’t happen outside a recession but I believe the likelihood of a prolonged bear market is significantly reduced in a growing economy. In March of 2018, the AIER’s collection of leading indicators (those metrics thought to predict the near future) was at its three-year high. This in no way guarantees that our clients (or any investor) will do well but it may help explain why we currently have them fully invested.
If you’re looking for reassurance in times of market volatility, business TV is unlikely to provide it. CNBC and other channels purport to offer all the market insight you need. But to be of real value, actionable news must be received before it’s broadly available. With 200,000 others watching at the same time, what sort of advantage are you really getting? My advice is to avoid the talking heads – and especially the shouting heads. Investing is a long term process. It’s best undertaken with thoughtful planning and without making abrupt changes based on comments from a reporter who’s probably no better informed than anyone else.
While the advice WWA provides is very specific to each client’s situation, several themes recur: maintaining adequate insurance, keeping estate planning documents up to date and attempting to minimize taxes. Of course, pursuing a long-term investment strategy is one, too.
I’m not sure how we’d counsel Charlie Brown, should he ask for our advice going into this fall’s football season. Answers vary with circumstances so our response to him would be based on how we interpret his situation at the time. That said, I think caution would be advised. As always, please contact us when you’re looking for impartial advice for your own unique situation.
(1) Vanguard analysis based on the MSCI World Index from January 1, 1980, through December 31, 1987, and the MSCI All Country World Index thereafter. Both indexes are denominated in U.S. dollars. Our count of corrections excludes those that turned into a bear market. We counted corrections that occurred after a bear market had recovered from its trough even if stock prices hadn’t yet reached their previous peak.