Thoughts on the Market

Just a couple of weeks ago, we seemed bullet-proof. The market was hitting all-time highs, and it seemed impervious to any negative news. We shook off concerns about a global slowdown from the trade war and tariffs, and even the early news out of China regarding the coronavirus didn’t seem to cause any worry among investors.

How quickly things can change. Last week was the most dramatic market selloff since the financial crisis. After hitting all-time highs, the S&P 500 Index has posted seven straight days of losses and as we look ahead there isn’t much clarity as to where the market goes from here. So, what should we do?

Maintain a Long-term Perspective

The economy and markets are cyclical. They expand and contract, repeating that cycle throughout history. At times we seem to forget this; the length of the current expansion has certainly not helped our memory. In order to be successful, we need to maintain our focus on long-term savings and investing goals.

Trying to time the market, getting out before it falls, and getting in before it comes back doesn’t work. This past week is a great example. Nobody was calling two weeks ago, saying they were ready to get out of the market. Things were going great and the market seemed to shake off prior news of the coronavirus. Now the market has fallen, and people are reacting, wondering whether to pull money out of stocks and place it into safer assets. Those investors may miss out on further declines but aren’t likely to get back into the market until it is posting strong gains, perceiving those gains to signal that the risks are behind us. Just as the declines happen suddenly, so do the gains. Investors are better to plan for the long-term, experiencing the gains and losses, ultimately rewarded by the long-term growth of markets.

"You get recessions; you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets." - Peter Lynch

“The behavior gap is why the average investor meaningfully underperforms the average returns for asset classes over time. Yet, many can’t resist the temptation of irrational behavior during nerve-racking volatility and irrational exuberance.”

― Daniel Crosby

Continue to Contribute

Investing is counter intuitive. It is the one area of our lives that less activity tends to reward us. We all feel compelled to do “something” when the market turns. In school, at work, we have learned that working harder, doing more research, putting in the extra hours, rewards us. Investing is the opposite.

So, what should we do? Stick with your plan. Keep contributing money to your retirement account. If you are a risk-taker, consider accelerating your contributions to buy when stocks are cheaper. Beyond that, have patience and focus on something else.

“The stock market is a device for transferring money from the impatient to the patient.” – Warren Buffett

“Put time on your side. Start saving early and save regularly. Live modestly and don't touch the money that's been set aside.”

― Burton G. Malkiel, A Random Walk Down Wall Street

Reassess Your Risk Tolerance (Not Now: But in the Future)

If this decline has been painful, and you have been tempted to pull your money from the market, you are probably invested too aggressively for your risk tolerance. Right now isn’t the time, but once markets settle down, and recover some of their losses, you should consider reassessing your risk tolerance and portfolio allocation. You are better to be more conservative through time rather than take on too much risk in rising markets, adjusting to a more conservative allocation after the market declines, and repeating that cycle through time.

"If you have trouble imagining a 20% loss in the stock market, you shouldn't be in stocks."

-- John Bogle

Avoid Market Prognosticators

Volatile markets tend to bring out market prognosticators. “Experts” who will tell you they saw this coming and have certainty about what is to come next. Ignore all of them. Nobody knows what comes next. We know what has happened in the past; we can make educated guesses about what will happen in the future, but ultimately, they are guesses. Avoid the experts and stick with your plan.

One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute. – William Feather

In the short run, the market is a voting machine, but in the long run, it is a weighing machine. – Ben Graham

Returns are Compensation for Risk

Why do we expect stocks to reward us over the long-term? Because those rewards are the compensation for the risks that we assume when we invest. Market selloffs are critical to the functioning of capital markets. Without the risk of losses and volatility of market values, we would not be rewarded with higher returns for stocks. Sticking your money under your mattress eliminates those risks, but also eliminates the potential for any rewards.

"In investing, what is comfortable is rarely profitable." - Robert Arnott

Take Care of Yourself

Lastly, take care of yourself. Follow good prevention techniques and be knowledgeable on the situation, but keep it in perspective. The uncertainty of the current situation is stressful. We worry about the unknown, and that worry can have a powerful hold over us. Market selloffs are also stressful. Don’t do things that are going to add to that stress. Be aware and informed, but then focus on those activities that reduce stress for you. Exercise, spend time with family and friends, read a good book, or cook a great meal. Spend time with whatever activities bring you joy.

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