You Asked, So We’ll Answer
FOQ: Can I lose all my money?
Long: We’ve all heard stories of someone’s cousin or whoever “losing it all in the market”. Here’s how that happens: Pick a stock, any stock, or maybe one you like (weed stocks are a popular pick these days, though slightly behind small pharmaceutical stocks racing for a virus cure). Put all your savings into that one stock, and if it’s anything like Enron or Sears or Pan Am or Lehman Brothers…poof! David Copperfield would be proud.
For each of those high-profile bankruptcies, there are hundreds of small, public companies that never quite figured it out (like some of those weed stocks already). The Little Engines That Couldn’t, if you will. But stocks aren’t the only way to lose it all. More sophisticated instruments like options, futures, and derivatives, to name a few, can wipe you out in a day.
Perhaps by now you’re thinking, “Well, that’s not me. I have mutual funds with thousands of stocks and bonds inside them.” Exactly. Enter diversification, the nemesis of “losing it all”. With us, you can’t lose it all, because you own a little bit of everything. You are completely diversified. It would take an actual apocalypse to end up like that cousin. And at that point, money would be the least of our worries.
FOQ: Do you think it will come back?
Long: Does it seem like it won’t? To a lot of people, sure, sometimes. A 35% drop in about four weeks will elicit such doubt. It helps to remember that while the mechanism changes (this time, a virus – every other time, well, here’s a list we wrote about recently), the outcome never does: something happens, markets go down, things calm down, markets go back up. We’ll say it again for good measure: This time is never different.
When will it come back? There’s no right answer to that question no matter when you ask it. The timing of the market has been and always will be completely unpredictable. But while we don’t know the direction or timing of the next 20% move, we absolutely know that the next 100% move will be up.
FOQ: Why not sell now and wait ‘til things get better then buy back in?
Short: Won’t work.
Long: It stands to reason that if things are bad today and the market is at where it’s at, then by the time things have gotten better, the market would already be higher. Probably much higher. And you’d miss out. That can happen in two ways:
First, let’s say you sell today, and in maybe four months from now some normalcy creeps back into the world, and by then, in response to the improving conditions, the market moves up 20%. Buying back in at that point means you just lost that 20%. The market won’t wait for you to get back in before it goes up.
Second, let’s say you sell today, and in four months, things still stink and the market drifts down another 15%. While you should, you would not buy at that point, because if you didn’t like it when things were bad, you’d hate it when things were worse. Just like the first scenario, you’d wait, albeit longer, until the market was higher than when you sold, missing the opportunity to get back what you temporarily lost.
As an example, the last time we saw a drop like this was in ‘08/’09. On March 9th of ’09, if we told you the economy would get worse for another six months, would you want to invest that day? If you said no and waited until the economy started to get better, you’d have missed out on a 50% gain.
We’re a little late on this one. The last time someone asked this was over a month ago. March 19th at 11am to be exact, before the market recovered by 20%. And no, that person didn’t sell anything.
John, Bill, Mark & Melanie