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What can you say?

What can you say?

| May 12, 2020

With so much suffering during this crisis, I consider myself fortunate being so minimally impacted relative to others.  It feels a little strange to think about, and plan for, the future during such a strange time, but I do believe we will recover from this. Besides, what else can we do?

"Don't do anything stupid."

The phrase hit me hard this morning. 

To develop a well thought out approach to investing for my clients, as well as my family, I study and learn from the smartest minds in the world. 

Once again, the results are in and nobody can reliably predict the future. 

Ignoring this fact and acting as if you can, is dangerous, and some might say stupid. 

There seems to be some correlation between how loud people are yelling and how incorrect they are; the loudest are the most wrong. Don’t tailor your investment strategy to the latest news cycle. 

Humility comes with experience.

"Don't do anything stupid." went through my mind again today because, lately, I have witnessed so many emotional and extreme investment decisions. 

By their very nature, these types of decisions almost certainly wouldn't have been planned for ahead of the stock market drop, or probably even looking back, but only time will tell on the second part… 

If your investment plan includes knowing what is going to happen in the short term,

you need a new plan. 

Here is an interesting thought experiment to help make the point.  While it is reasonable to assume stocks will outperform bonds over the long-term, it is not reasonable to assume they will outperform over the next month, year, or even five years.  In fact, bonds have had twenty-year periods where they have outperformed stocks!  If you can accept this empirical truth, that stocks tend to outperform bonds—but not always—, then you can start to accept other inconvenient investment conclusions.

We cannot predict where the stock market will go in response to any one variable.  There are literally millions of factors going into the valuations, and every second expectations are being adjusted to fit the new reality.  Yes, news can “seem” good or bad, but what are the second and third-order impacts of the news, and what will be the net result?

For example, today, it comes down to two developing themes affecting the stock market's outlook.

The virus vs. the government bailout.

Which will weigh heavier on the global economy for the decades to come?  Will the virus be around for years and force us into the Great Depression 2.0?  Or, as we settle into our new normal, will the stimulus jumpstart the economy into a new bull market in the not-too-distant future? It's really anybody's guess, and you can go down a thousand rabbit holes of people telling you this or that will happen because of such and such, but it's guessing. 

But don't ever fall into the trap of thinking you know what is going to happen.

If you arrive at certainty in your investment conclusions, you are setting yourself up for an expensive disappointment.

This is why we invest the way we do.  We cannot predict the future, but we can make assumptions about tangible things like how much money you will need to live. 

Though we don't have a robust enough data set to predict the future moves of the markets reliably, we do know they generally go up about 70% of the time.  We also know they tend to have big drops every 5-10+ years. 

So, if you know stocks are generally good to own, but stocks for retirement when you are young. Hopefully, you won't need the money until your 60's or later. 

Then, when you know you will need the money, do you want to keep it all in something that can easily lose half of its value or more?  Probably not, because then you would be selling Apple when it's down 40% to buy groceries, and you’ll miss the recovery because you no longer own it.  This is why, when the market is performing well, we start building a safe reserve of bonds, alternatives, and cash for you to use when the stock market takes a downturn.  I find that most clients like to have between five and twenty years' worth of "safe" money (defined here as less risk than stocks) to help ride out the inevitable dips. 

Forget about trying to time the markets based on news, astrology, or some email newsletter. 

"If you are not willing to own a stock for 10 years, do not even think about owning it for 10 minutes." -Warren Buffett.

It simply doesn't work consistently; if it did, people like Warren Buffett would endorse it.  Instead, today I'm hearing people that have been wrong for over ten years about the direction of the stock market say they are finally "right".  But if we followed their advice, you might have missed out on all or most of the longest bull market in history.

So, what can you do now

1) Review your financial plan and see where you are tracking. If you have asked us to complete a financial plan for you, we run a stress test on your investment portfolio.  This takes your life expectancy, and runs 1,000 lifetimes, good markets and bad, and tells us how frequently you would have enough money versus not. It's not perfect, and we aren't trying to say we know what is going to happen.  However, if we take the expected market returns along with expected market losses, and run the algebra 1,000 times, at least we have a reasonable mathematical model.  This is far superior to trying to predict the stock market, or worse, winging it, and not having an idea of how much money you will probably have to live on when it’s go-time.  If you would like to get a retirement cash flow plan started, or review yours already in place, please let us know.

2) I've written about "gut checks" before. If this drop in your investments shook you to the core, and you were unable to sleep, feeling nauseous, etc., we should probably talk about adjusting your risk when things normalize.  Figuring out you can't stomach investment losses is okay, but making rash or extreme decisions to de-risk your portfolio in a market panic is probably unwise.  When you do this, and I've seen it done more times than I can recall, you not only lose on the downside, but you also miss out on the recovery. 

Some clients recently wanted to discuss reducing their risk exposure after the stock market had dropped about 35%.  Fortunately, we were able to quickly come to agreement that none of us can predict the future.  They still wondered about cutting their risk more, even though we did that a couple of years ago because they were getting older and are approaching retirement age.  The target stock allocation we determined to be appropriate for them during "peacetime" was sitting about $50,000 light because of the drop, as I had not yet done my periodic rebalance to sell high and buy low. 


Reducing their stock target at this time and rebalancing toward it, would guarantee 100% of the downside we already had, but only provide about 80% of the eventual recovery because they would then own less upside potential with stocks.

This is how the tragic “panic math” works.  You wait for the panic, see the loss, sell and lock it in, then you don't recover when that eventually happens because your upside potential is gone.  People say they will get back in, but I've rarely seen that go well. 

This is usually a bad thing to do.

If you have a significant life event, like a terminal diagnosis, I understand wanting to completely de-risk. 

On the flipside, if no significant changes have occurred, and you have 10-20 years’ worth of your income needs in relatively safe money and you wouldn’t sell stocks otherwise, why do you want to do it in a panic?

This is an easy thing to reason, but a hard thing when it is happening to you. 

The old fight or flight response is strong.

PROBLEM: What is causing the pain?

ANSWER: Stock losses!

SOLUTION: Sell the stocks!

No, too late.  You should have had an appropriate allocation before the drop. Adjusting that in the middle of a crisis is probably not a good idea. 

3) Cut back on expenses. Not like that's hard these days with the lockdown, but that will end.  I think people might not spend money like they used to after all this is over.  There’s a whole closet full of suitcoats I would love never to wear again.  Office culture may become more casual after this, and I think many will keep the longer hair. 

If you didn't think you had enough this time, why not build up your reserves war chest? 

There will be more stock market crashes and tragedies in your future, if you live long enough.  When they come, they will still be awful and scary, but you will be better prepared. It's funny how some of the wealthiest people I know tend to be the most zen about market crashes.  I don't think it’s because they have so much. I think it's the confidence that owning businesses will continue to be profitable in the long run, and market pullbacks are an opportunity, not a detriment, to investing.

If you've made it this far, thanks for taking a look!

The TL:DR version is:

"The next time the market crashes, please don't make any rash decisions. 

You might be right that time, but you probably won't be doing yourself any good over the long run."

One of my friends recently said, and I paraphrase,"I give up, I can't time the market!" I congratulated him because I think it took me a decade or more in investments full time before I came to that conclusion. 

This is true in other things as well.  The next time you are pitched a sure thing, or “x must do y because z”, please stay skeptical.  There are big differences in degrees of confidence on things, and many are unknowable. 

If you start “throwing darts” based on essentially incomplete conclusions, it can mess up your life.

Thanks for taking a look!