Don’t Just Do Something, Stand There!
Not how you remember that phrase, right? It’s backwards, like so many things in regards to investing. Buy when you’re afraid? Sell when you’re excited? Avoid a hot stock or fund?
As human beings, we are genetically programmed to avoid danger, to find safety in numbers. And for so much of life, it works. But this programming works against us when it comes to investing. It’s not surprising. Stock markets are a mere 500 years old, a blip compared to our own history, and not nearly enough time to influence the circuitry of our brains. It makes sense to run from a pack of wolves. But to run from a down market? Not a good idea. It makes sense to follow the masses to a bountiful source of food. But to follow each other to last year’s best fund or sector, as most do? Even worse.
This war between your genetic code and disciplined investing will rage forever. A particularly tough battle occurred in 2015. After enjoying five positive years out of the last six, 2015 brought negative single digit returns for a properly diversified investor. Large US stocks eked out gains, but small stocks did not. Foreign stocks of any size were slightly negative. Emerging market stocks got hammered with double digit losses. Across the globe, the value side of stocks was handily beaten by the growth side. Most bonds were barely positive, some negative. The combination of these factors resulted in returns of -6% to -2%, depending on your account objective.
It wasn’t 2008 or even 2002, but losses hurt more than gains feel good (more programmed circuitry). And even though 2014 was a positive year, its gains were small. Combined with 2015, we’ve had two years of slightly negative market returns. And add the first week of 2016…
What’s our human reaction to such returns? To not just stand there but do something. Anything. Once again, our genetic code takes over. And so we ask: where are the bountiful returns? What is everyone else doing? Why stay in emerging market stocks? But our survival instincts, ironically, often lead to the death of our portfolio – or at least to significant harm.
Chasing returns and trying to outwit the market for short-term success – what we are programmed to do – will only lead to long-term disappointment. All of the evidence shows this. But a prudent, disciplined investor accepts short-term disappointment in exchange for long-term success. In other words, don’t just do something, stand there.
We certainly know that staying the course in times like these is hard, indeed. We also know that risk and return are inextricably, inseparably related. In the past couple of years, you’ve taken the risk, and it was painful. Sell now, and you receive nothing for having taken that risk. But you’ve earned the reward. Let it come to you. The evidence tells us that it will. When? No one knows. But therein lies the risk. Earlier we mentioned 2002 and 2008. Those who persevered through those years were well rewarded. In fact, every single market downturn in history has been countered by a recovery that rewarded those who persevered.
Lastly, congratulate yourselves. Not one of you has waived the white flag during this trying time. While we’d like to take the credit, the credit is all yours. You ultimately make the decision to either do what’s right, or do what’s easy. Too many people do what’s easy, which leads to failure. Be proud that you persevered. It’s one of the toughest yet most rewarding things to do.
Best,
Bill & John