Lifetime advice

Blog post #477

The advice is simple. Living it is much harder.

You should remain invested in the stock market for the long-term, regardless of what is happening in the world, in a diversified manner, at a level that is consistent with your need, ability and willingness to take risk.

This means you should not get out of the stock market in a significant manner or go mostly to cash, no matter what is happening in the stock market, economy, politics or other factors.

This means that if you are in the accumulation phase, when you have money to invest and have a long-term time perspective, you should keep investing in stocks on a regular basis, irrespective of what else is going on. This is what we do.

In general, you should only change your stock allocation when your financial or life circumstances change. This means that your stock allocation will likely change as your wealth grows and as you get older, but not due to external factors.

Why are we writing this? Because regularly investing in the stock market and sticking to your stock allocation, through good and bad, is some of the most important advice we can convey to you as financial advisors.

Some people struggle with these concepts. They may get very nervous during a downturn and want to go to cash. Others are hesitant to invest in the stock market now or at other times because they think the market is “overvalued,” at a peak, or for some other reason (like a “potential” oncoming recession or the fear of higher future taxes).

We feel you need to have a guiding set of investment principles and stick to them. For our firm, remaining invested according to your long-term plan is one of these core principles.

But sometimes, should we make an exception to our own core principles?

Last year was one of those times when we challenged our long-held belief. When the pandemic began and started spreading outside of China during January and early February, I became increasingly concerned about Covid. I began questioning if this was a time to sell or reduce client stock allocations. As Covid started spreading in the US in late February 2020, Keith and I talked about this extensively, for hours, over many days.

Was the onset of Covid a reason to try to time the markets? After much consideration, we determined that there was no way that we could time the markets successfully, as you need to determine when to sell (February 2020) AND be able to determine when to buy back into the markets. We had no way to rationally figure out when to buy back into the market. We knew this downturn was different than most prior downturns, but we also knew that most prior major downturns seemed unexpected and unique at that time. We decided to adhere to our core philosophy and recommended that clients remain invested.

  • In hindsight, we made the correct decision by staying in the markets. Instead of selling in February/March 2020, we recommended that clients should gradually begin buying stocks after the markets had dropped significantly.

We knew from past financial history that markets generally rebound way before “the all-clear signal” is readily visible. Stock markets tend to be very forward thinking. By the time it eventually seems “safe” to get back into the markets, the markets have usually already advanced much higher from their bottom.

This is exactly what occurred in late March, which was the approximate bottom for the S&P 500. The stock market rebound began when lockdowns in the US were just starting and Covid had not even reached its worse impact, medically or economically. We made the proper decision not to temporarily get out of stocks due to the Covid pandemic, as US and global markets have strongly rebounded since March 2020, to higher levels few would have predicted a year ago.

To be a better investor, you should try to understand the following concepts:

  • No one is consistently able to accurately predict the future of the stock market. Market timing does not work.
  • The long-term path of the stock markets, US and globally, are upwards.
  • Declines in the stock market are temporary. The long-term historical path for the stock market since the 1920s has been upwards, with declines along the way that have been temporary. We do not see any change in that long-term pattern.
  • Peaks in the stock market are temporary, as they are exceeded by higher highs. This means that at some point in the future, the highs of today will be replaced by higher levels.

So you are prepared in advance, we want to remind you what normal declines are in the stock market when you own a broadly diversified portfolio.

  • It is normal for stock markets to decline at least 10% during almost every calendar year, from top to bottom, at least once during a year.
  • It is normal that stocks will drop a lot, like 20%-30%-40%, or more, every 3-5 years.

Addressing these issues of market timing and continuing to invest on a regular basis are some of the most important services that we can provide in our relationship with you.

  • If these are concerns or issues for you, we would be pleased to discuss this with you. We can listen to each other and work through your concerns, so we can determine an appropriate stock allocation for you and your family for the long-term. That stock allocation should enable you to have the ability to remain invested and learn to get more comfortable, so that your money can work for you and to help you reach your life and financial goals.

We want to work with you to develop a financial plan that includes an asset allocation to stocks that you can live with, when markets are rising and when they are dropping. That is how you can be a more successful long-term investor.

Talk to us.  We want to listen.  We want to assist you, your family members and friends.

 

Source:  *27 Principles Every Investor Should Know, by Steven J. Atkinson (Illustrations by Dan Roam) July 2019

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