Considering recent world events and the prevailing negativity in the news, I believe it is an opportune moment for us to discuss the importance of staying the course with our investments. With headlines dominated by global crises, market volatility, and economic uncertainty, it's easy to succumb to fear and doubt regarding our investment decisions. In thisnewsletter, we will focus on the risks associated with selling investments, both in high and low market environments. By examining historical data and real-life examples, we will underscore the importance of discipline and resilience in sticking to our investment strategies, especially during times of uncertainty. |
Staying The Course |
The fear of a falling market is ever-present. As the saying goes, "The market always feels like it's either too expensive or too risky." You may notice that too expensive and too riskyare two descriptions of the same thing. That is, both are assuming that a decline is soon to come. Spoiler: a decline is always coming; it's just that nobody knows when. But every decline has historically been temporary in nature as evidenced by the fact that the market is up 70X[1]since 1960, not including dividends. With that history in mind, it probably won't surprise you to know thatI believe the real risk lies not in the decline itself, but in selling in anticipation of such an event. As implied by the quote above, this risk exists in both declining (too risky) and rising (too expensive) markets. Let's explore how this risk might play out in both scenarios. Imagine selling near the bottom of the Great Financial Crisis (GFC). In March 2009, the market reached a low of 676[1]. Anyone who sold near that point—and it's important to note that most selling occurs near the bottom since this is how bottoms form—most likely missed significant growth during the rebound that followed. The 10-yr. avg return of the S&P 500 following March of 2009 was 306%[2]! The longer they waited to re-invest, the more they were likely to lose since the market never again returned to those levels. This might be an extreme example, but it illustrates why I encourage staying the course during market declines because you simply never know when the market will turn. Now for the other side of the equation… Selling into Rising Markets: Selling into a rising market is a risk that is rarely discussed because it's so counterintuitive, but it's equally risky. A common indicator that this risk is present is when you hear "experts" encouraging you to take your profits while you can under the assumption that the market is "destined to fall" due to a myriad of smart-sounding reasons. I understand the allure here. This advice sounds prudent because we've all been taught to "buy low and sell high." There's even a handy catchphrase, "You can never go broke taking a profit." While that may be somewhat true in theory, I'd argue that it's just as much of a recipe for poor long-term returns as selling in a declining market is. Let me explain. An example of this phenomenon occurred back in December of 1996. This was when Greenspan made his famous "Irrational Exuberance" speech[3]. Indeed, the market at that time was sparkling as valuations had come unglued from business fundamentals. But in the time following Greenspan's very logical warning, the market went on to double over the next three years[1]! This means if you exited the market after his speech, you would have been forced to endure watching the market run away from you at a breakneck pace for three full years. In our world of 24/7 news coverage, this would have felt like an eternity. At what point would you have decided you were wrong and piled back into the market? Of course, what followed in 2000 was a significant bear market, potentially compounding the initial error. As another example, since 2009, Harry Dent has published seven different books about "the coming crash." Perhaps Dent's theses were solid, but the market is up about 6X since the first of these books was published[1]. Thus, selling into rising markets can be a punishing exercise. Since the start of 2020, we've experienced both rising and falling markets, providing plenty of opportunities to make either of these mistakes. Just as history has shown time and time again, long-term investors who sat tight amidst the turmoil have likely done quite well since time is usually on the side of the long-term investor. Feel free to reach out should you have any questions or concerns. I would love to help guide you through the twists and turns of the market. |