As we have entered this traditionally most volatile time of the year for markets, I wanted to share a few thoughts that I think are important to keep in mind and to help us maintain our peace of mind if market swings get “uncomfortable”.
1. Market Prognostications Tell Us More about the Prognosticator than the Future.
To be totally honest, I love to follow markets and to look for indicators as to what might happen next. In fact, in my last two quarterly articles, I tried to answer first (in April) “What do I think about the market?” then (in July) “What would my dad think about the markets?”. While I enjoy musing on such things, I want to be clear that we do not invest for our clients (or ourselves) based on any kind of prediction of the market’s short-term direction. To my mind, employing market “views” in an investment process is more or less gambling. What is not gambling is aligning our investment strategies with the only market prediction that makes sense – stocks will go higher over time. As I’ve said at the depths of market declines and will say now at the current heights of this bull market, the Dow Jones is no doubt headed to 100,000 in my lifetime. Currently at around 35,000, I don’t know if it will head back to 30,000 or 20,000 … first, but I do know that I want to be on board for the inevitable move to 100,000! This may seem fanciful but if the Dow compounded at about 10.5% (close to its long-term average), it would hit the target in about 10 years. Since I have my own comprehensive financial plan based on a projected multi-decade retirement time horizon, I certainly hope to be around to enjoy the increase.
I have certainly heard the statement above about prognostication in the past but cannot find (via Google) to whom to attribute it. The key is to remember that the future is unknowable. I believe that anyone who makes short-term market predictions is essentially guessing. They probably will be right some of the time, which can hook other people into believing they have predictive power when in fact it’s just a fool’s errand. I certainly hope that, when I prognosticate/guess, it is with a sense of humility and curiosity.
2. When it comes to investing, Gordon Gecko got it wrong when he said, “Greed is Good”. I’d say, “Boring is Good”.
Some of you may remember the 1980’s movie Wall Street starring Michael Douglas as a less-than-honest wheeler-dealer named Gordon Gecko who famously said that “greed is good” in making a case for unbridled capitalism. It did not turn out so well for Gordon, as he ended up in prison. While greed may be a key ingredient in the ability of capitalistic systems to grow and allocate resources, it is, of course, not a good way to invest. As we have written many times, the emotions of fear and greed tend to be the investor’s worst enemies. In fact, Warren Buffett famously said that he tries to “be greedy when others are fearful and be fearful when others are greedy”.
So, why do I say that “boring is good”. For one thing, I’ve pretty much seen the most successful, non-professional investors have the best outcomes when they just rigorously adhere to their investment strategies without paying much attention to the daily headlines, nor the latest hot fads, nor even the current state of the markets. The greatest successes come from setting a long-term strategy and approach into place and somewhat monotonously executing it over the years. Personally, I’ve lived some experiences as a short-term (day) trader prior to the founding of Moller Financial that often had moments of great excitement, even at times terror. These times didn’t work well for me financially and I doubt that many can successfully day trade on a long-term basis.
The challenge is to simply maintain a state of equanimity amid all the noise and new crises du jour. It may not be too exciting, but as Rudyard Kipling might have said “(in investing it’s important to) keep your head when all about you (others) are losing theirs …”
3. Volatility is what makes it work.
As noted above, these last few months of the year tend to be some of the most volatile. Despite generally offering decent returns, October in particular is known for some of the biggest crashes – the infamous Stock Market Crash on October 29, 1929 and the Black Monday crash of October 19, 1987!
Despite these extreme cases, I would argue that volatility is the long-term investor’s best friend. Remember that volatility is a measurement of swings in markets and individual securities in both directions. Even including the periodic harrowing declines, it is important to remember that long-term returns are a function of volatility. In other words, the investments that can move the most up and down are the ones that can provide the greatest long-term return. Here are some examples:
- At the extremes: Money market funds have basically no volatility and also sport the lowest returns (currently not much more than nil). At the other end of the spectrum, the riskier smaller-company stocks experience some of the highest volatilities of any investments. Yet, studies have shown that with this increased volatility comes superior long-term returns, higher than money market funds, bonds, and even large-company stocks. If we stay with our plans for the long-term, we realize these higher returns. The price we pay is not financial but rather emotional as we simply have to stomach the periodic scary dives without panicking to get the inevitable strong long-term returns.
- Recent experience: In March of 2020, at the onset of the pandemic panic, the S&P 500 lost roughly one-third of its value in just a few weeks, the quickest decline of that magnitude in history. We seemed to be in uncharted territory, but from a market point-of-view, we were not. Accordingly, instead of panicking and selling with the crowd, we took advantage of the sharp decline (increase in volatility) to rebalance into beaten up equities that were selling at prices we may not see again in our lifetimes. Volatility is indeed our friend, especially when it doesn’t feel like it.
My hope, as we head into this holiday season with the pandemic continuing to dramatically impact our lives, is that we can follow these tenets so that we can at least relax knowing that our portfolios are in good shape regardless of what the market throws at us, freeing us to treasure our times with families and friends.