Punched in the face
Robert P. Seawright writes on his blog that investors have to face fear every day, more so on some days than others. To quote Jason Zweig paraphrasing Mike Tyson, “investors always have a plan until the market punches them in the face.” Every investor got punched in the face during 1Q 2020. Over and over. What’s an investor to do? The obvious temptation is to sell and maybe hide, but betting against the market is a dangerous business. Peter Lynch famously said that more money has been lost trying to avoid bad markets than in the bad markets themselves.
We humans don’t handle the stress well. As Laurence Gonzales explained in Deep Survival, “it’s easy to demonstrate that many people (estimates run as high as 90 per cent), when put under stress, are unable to think clearly or solve simple problems. They get rattled. They panic. They freeze.”
Our quite natural reaction to market volatility, to fear, is to bail. Trying to time the market in that way comes with a crazy-high degree of difficulty. Market-timing successfully means making many immensely difficult and complicated decisions and being consistently right. There is no reason to expect anyone to be able consistently to navigate difficult markets without losses.
On the other hand, staying in the market has significant advantages. Studies concluded that an average of just three days per year generated 95 per cent of all the market gains. Long-term returns accrue in bunches, and, in the markets as in the lottery, you’ve got to be in it to win it (although the market offers an exponentially greater chance of success). Moreover, the majority of the market’s best days occur within two weeks of the worst days (as we’ve seen recently), meaning that if you could somehow avoid the worst days, you would almost surely miss a lot of best days. It generally pays to stay invested.
Trying to “go to cash” at opportune times and, equally importantly, buying back in at the right time, is a loser’s game. Market timing strategies are frequently tried, rarely, if ever, successfully. Stocks are worth their volatility, the necessary price you pay for the much higher expected returns of stocks as compared with other investment choices. Accordingly, the longer the time frame we use for reference, the more powerful stocks become.
That’s why truly long-term investors shouldn’t worry about market volatility, which raises what is likely the crucial question: Are you a long-term investor? Those who recognize that fear will get the better of them might consider a portfolio mechanism like a pressure relief valve to try to help manage their fears. A decent portfolio that you can stick with is far better than a perfect portfolio you can’t. [Quick Check: How often did you check your portfolio last week? If your answer is something like, “A lot,” Seawright may well be talking about you]
Seawright concludes that despite the current turmoil, the difficulties of which should not be underestimated, the probabilities still favour investment. By a lot. Our brains all echo with fearful thoughts, whispers, and imprecations. For most of us, most of the time, we’d do well to ignore them about our investment choices.