Like many investors, you might be concerned about recent market volatility. We wanted to share some additional feedback.
Market timing never works as planned. Back in the 1970’s, Stewart Eads, President of Eads & Heald Wealth Management, competed against firms that touted themselves as “market timers”. Those types firms are effectively extinct, and for good reason! Actual practice and academia has clearly demonstrated that timing the stock market near or intermediate term is not prudent.
At first signs that the Corona virus ("COVID-19") is abating, one will almost certainly see a reverse of the market to the upside. But, then, let’s say an unforeseen glitch appears and the market heads down even further than before. Thus, the foibles of market timing.
For serious long term money, attempting to time the market never seems to end well. As stated above, if market timing made sense there would be such firms with good long term records selling those skills! There are no such firms of any substance or tenure.
Investor psychology is a growing field but there are some helpful lessons from this area of study. Eads & Heald Wealth Management often sees investors make the mistake of buying when the market is experiencing "euphoria" and selling when the market is seemingly in "despair". In fact, an investment research company called DALBAR studies things such as investor behavior (typical retail investors) and related attempts at "market timing".
DALBAR concludes that "investors who hold onto their investments have been more successful than those who try to time the market". DALBAR's research also indicates that the behavior of average investors is the number one reason for investment underperformance. Investor behavior can be defined as the psychological traps, triggers and misconceptions that cause investors to act irrationally. That irrationality leads to buying and selling at the wrong time, which leads to underperformance.
One thing that all the negative investor behaviors have in common is that they can lead investors to deviate from a sound investment strategy. The best way to ward off the aforementioned negative behaviors is to employ a strategy that is not reactive to short-term market conditions. The data also shows that when investors react, they generally make the wrong decision. The consequences of this investor behavior can be serious and detrimental to long-term financial goals.
The stock market hates uncertainty. The COVID-19 situation has created intense uncertainty and the stock market is reacting accordingly in the short-term. Once the world establishes clarity on the virus, regardless of whether the healthcare outlook is rosy or gloomy, the market will almost certainly stabilize. Things will stabilize even further if a cure/vaccine is developed and available globally.
The recent virus uncertainty is much like an asteroid strike - a totally unexpected event that causes mass panic. However, COVID-19 does not define the United States economy or the investment markets. It is a temporary situation which we will overcome. The United States economy is resilient & strong, and we will get through this period of time eventually.
Historical perspective helps us understand current volatility. Recall that the stock market dropped about 49% around the years 2000 & 2001 as a result of the bursting of the "Technology Bubble", Y2K fears, and of course 9/11. In 2008, the market suffered a decline of around 57% as a result of the "Housing Bubble" & corresponding financial crisis. Yet most committed long-term investors survived and thrived after all of those events.
Think of volatility as part of the cost of successful long-term investing.
Downturns are not rare events. Luckily, strong recoveries are also not rare. Typical investors endure many of both during their lifetimes. Even knowing this, it can be unsettling to witness the decline of your portfolio during one of these events. When market conditions place your goals in jeopardy, investors may feel compelled to do something, such as sell investments. You may assume that doing so will give you a better long-term result than staying invested. But such action would shut you out of the strong recoveries that have historically followed market downturns.
That being said, if you feel that a change in asset allocation is appropriate given a fundamental change in your situation or personal risk tolerance, we can certainly manage such a shift. Please recall that portfolios which are designed to be less volatile also tend to sacrifice upside performance long-term. There is "no free lunch" nor is there any way to have it both ways; ads on TV or radio that promise any such thing are just "market timers" in disguise and/or padding their own pockets at your expense.
We appreciate your time. Call or email anytime.