Looking back at the year 2020, and forward to year end, we can be sure that this is one for the history books. By the time the year is over, we will have experienced record market highs, record employment numbers, pandemic, market crash, market recovery, lockdowns, murder hornets, unprecedented loss of jobs, loss of many small businesses through mandated closures, massive government stimulus aimed at reducing the economic damage, loss of valuable learning time for schoolchildren, change of many businesses to mostly virtual from mostly in-person, stay-at-home mandates, mask mandates, and a contentious election, to mention but a few things. By almost any measure, 2020 has been a year to test one's resolve as an investor.
In times of market turmoil, investor resolve is clearly the difference between success and failure. As always, with respect to your investments, we don't know what to expect as an encore through year-end. We know that the ultimate difference between good investment results and bad investment results is investor behavior. In this case it is about mastery of our impulses arising from fear. Remember that fear is probably the worst of all possible initiators for investment decisions. With this in mind, when it comes to market turmoil, our philosophy about market downturns, however severe is:
- Downturns will happen (forget might, could or maybe). They will happen. We just don't know when or how much.
- Portfolios are designed and structured to absorb downturns as well as benefit from upturns.
- Portfolios are broadly diversified across the globe and across asset classes.
- When we talk about investment risk, this is exactly the risk that we choose to accept in exchange for the expected returns. Risk and return are inextricably linked.
- There is no point in the downturn cycle where we will "throw in the towel" and sell out. None. Ever.
- The lower the market goes and lower the price of the holding, the more valuable it becomes; the more you would like to be the owner of those shares.
- As the market declines, the expected rate of return of the underlying shares increases with each step. So while prices are high (and everyone is happy), expected returns are lower. When prices are down (and everyone is scared) expected returns are high.
- Because we hold only broadly diversified pooled investment vehicles, there is realistically no risk at all that the investment will go to zero, unlike individual stocks which can go away.
It’s certainly understandable if the prospect of economic uncertainty unfolding over the remainder of 2020 has got you wondering – or worrying – about what’s coming next. No matter how you feel about the near future, it’s easy to see that the near-term future can cause considerable market turmoil. If you’ve got your doubts, you may be wondering whether you should somehow shift your portfolio to higher ground, until the coast seems clear. In other words, might these stressful times justify a measure of market-timing?
Regardless of how the coming weeks and months unfold, we urge you keep your carefully structured portfolio on track as planned. This probably doesn’t surprise you.
Here are some important reminders on the perils of trying to time the market – at any time. It may offer brief relief, but market-timing ultimately runs counter to your best strategies for building durable, long-term wealth.
- Market-Timing Is Undependable. It’s only a matter of time before we experience another market downturn. As such, it may feel “obvious” that the next one is nearly here. But is it? It’s possible, but market history has shown us time and again that seemingly sure bets often end up being losing ones instead.
- Market-Timing Odds Are Against You. Market-timing is not only a stressful strategy, it’s more likely to hurt than help your long-term returns. Over time and overall, markets have eventually gone up in alignment with the real wealth they generate. But they’ve almost always done so in frequent fits and starts, with some of the best returns immediately following some of the worst. If you try to avoid the downturns, you’re essentially betting against the strong likelihood that the markets will eventually continue to climb upward as they always have before. You’re betting against everything we know about expected market returns.
- Market-Timing Is Costly. Whether or not a market-timing gambit plays out in your favor, trading costs real money. To add insult to injury, if you make sudden changes that aren’t part of your larger investment plan, the extra costs generate no extra expectation that the trades will be in your best interest. If you decide to get out of positions that have enjoyed extensive growth, the tax consequences in taxable accounts could also be financially damaging.
- Market-Timing Is Guided by Instinct Over Evidence. As we’ve covered before, your brain excels at responding instantly – instinctively – to real or perceived threats. When market risks arise, these same basic survival instincts flood your brain with chemicals that induce you to take immediate fight-or-flight action. If the markets were an actual forest fire, you would be wise to heed these instincts. But for investors, the real threats occur when your behavioral biases cause your emotions to run ahead of your rational resolve.
We’d like to think one of the most important reasons you hired us as your financial advisor is to help you avoid just these sorts of market-timing perils – during just these sorts of tempting times. Even if you do everything “right” in theory, we still cannot guarantee your success. But we are confident that sticking with your existing plans represents your best odds in an uncertain world.
So, if you have your doubts, please let us know. It’s our job – not to mention our fiduciary imperative – to offer you our best advice across all of the market’s moves. While market-timing may be illusory, we are here for you, ready to explore various real steps you can take to shore up your investment resolve, regardless of what lies ahead.
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The table below shows the returns through September 30, 2020 for selected investment asset classes. In most cases, the results below are appropriate benchmarks for the related mutual funds in your investment portfolio.