There is always a list. The items on the list change regularly. The purpose of the list does not.
It’s a list of things to worry about. We all have a list. Some of the items on the list are particular to our personal situation, whether they’re our age, finances, or job. It’s an important list, but the list I’m referring to isn’t that one.
The list I’m talking about is the list we all share. Right now, that list has five big items on it.
- Inflation
- Rising interest rates
- The war in Ukraine
- The possibilitity of COVID-19 causing a recession in China and China invading Taiwan
- Domestic politics
Five years ago, that list was almost completely different, but there’s always a list. Sometimes, like now, several items on this list converge to create considerable uncertainty. Investors hate uncertainty.
The expected result of that uncertainty is that markets do not fare well. And that’s painful to all of us who are invested in markets. So what should we do about it?
Should we sell everything and go to the sidelines? Should we change investments to ones that look like they will do better in these times? Should we do nothing?
Let’s look at these one by one.
Selling
I recently came across an interesting data set. Tracking the S&P 500 back to 1980, a period of 42 years, the market finished the year higher than it started in 32 of those years. That’s 76 percent of the time.
If you get out of the market, you’re betting that the market will continue to fall. History says that’s not a good bet because 76 percent of the time the market has finished the year higher.
Actually, over the last 42 years, the market was down at some point during each year, but in 76 percent of those years the market was higher by the end of the year. For those who like pictures, the graph below shows how much the market was down during each year.
One of the hardest things to do in financial markets is picking the top or the bottom. Picking tops is especially hard in a market with an overwhelming history of rising. The question really is, why bother?
The odds should favor bottom picking, but to try that, you need cash to buy. If you went with the odds, you would not have sold at what you guessed might be a top, meaning you would not have cash to buy at what you guessed would be a bottom.
If you try to pick a top, there are several possible outcomes. If you are wrong, then you’ll get out of the market when you should stay in. When you are wrong about picking a top, prices keep on going up. Then you are faced with the choice of staying out and missing the continued advance, or getting back in at higher prices. Either way, it’s a costly mistake.
But maybe you guess right. Maybe the market does top around the time you get out of the market.
That’s great—but now you have a problem. When do you get back in? Getting the timing wrong could also be costly, potentially eliminating the benefit of choosing correctly when to get out.
Changing Investments
Should we change our investment style to suit the times? Maybe. First, you have to consider your investment goals. The main focus at times like these should be to stay within your plan. And if you don’t have a plan, better get one! Because if you don’t know where you’re going, you’ll probably get there—meaning nowhere!
Some investment trends persist for years. In recent years, most of the time growth stocks have been a great investment. But this year, value stocks have been better. Do you want to invest like a professional? The way to do that is to occasionally shift your weightings. In other words, giving more weight to one kind of investment than others, and then if circumstances change, shift the weightings. This can be a valid strategy. To be sure, it is fraught with some of the same pitfalls as the previously discussed strategy of trying to time markets, but the degree of risk is much smaller.
Doing Nothing
To many people, doing nothing seems completely crazy. I mean, look at the current list from the start of this article. The world is going crazy and you want me to do nothing? Are you kidding?
But refer back to the chart. Every single year the market has dropped at some point. And every time there were reasons for it. Every time there were people scared out of the market.
And while no one can guarantee that the future will look like the last 42 years, it does seem pretty likely to keep happening the same way. So doing something when the world seems crazy and the market is falling might be what your emotions are demanding, but given history, it also seems to be the least rational thing to do. Or, stated another way, doing nothing can actually be the most rational thing of all.
Hal Masover is a Chartered Retirement Planning Counselor and a registered representative. His firm, Investment Insights, Inc is at 508 N 2nd Street, Suite 203, Fairfield, IA 52556. Securities offered through, Cambridge Investment Research, Inc, a Broker/ Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Investment Insights, Inc & Cambridge are not affiliated. Comments and questions can be sent to hal.masover@emailsri .com. These are the opinions of Hal Masover and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. Past performance is no guarantee of future results.
Indices mentioned are unmanaged and cannot be invested in directly.