Investing is a dangerous business that requires us to prepare diligently for incredible uncertainty and volatility. Relatively steep stock market declines are generally disorderly and create a contagion of fear, and regrettably, too many investors eventually lose confidence in the stock market in general and their portfolio in particular. It is in our DNA to believe that when stocks go down 5 to 10 percent in value, there is something the “market knows" but us little folks do not. This mindset creates fear, which often generates hitting the panic button. Preventing my clients from bailing out of a well-designed investment plan is arguably my single most important job as a financial advisor.
I put forth that this chart illustrates the generalized behavior of market participants (contrary to the title) a few days before the Brexit vote and the days following. Wait, you already forgot about that Brexit thing! All the gnashing of teeth about Great Britain leaving the European Union was a huge waste of time. Contrary to what the pouting pundits of pessimism wanted us to believe, the world economy was not going to shut down because the U.K. left the European Union after 43 years. Unfortunately, far too many of us have a tendency to believe that we live in the most uncertain of times. Thus, it is not surprising that we might believe our challenges are both unique and overwhelming, but when viewed through the sobering lens of history, we find they are neither.
After the big decline of that somber “Brexit” Friday, many investors caved on their long-term game plan by listening to the doomsayers and sold out with the idea that they would wait for calmer waters before entering the shark-infested sea again. When these market-timing folks go to cash, they have to be correct not once, but twice! First, they have to get it right on the sell side and then they have to be right again on the buy side. I cannot begin to tell you how many investors fall prey to the painful and embarrassing whiplash effect. Perhaps the selling part is easy, but knowing when to buy back is incredibly difficult, as nobody rings the bell to say the coast is clear. Therefore, investors notoriously procrastinate repeatedly before finally pulling the “buy back” lever.
For example, if the market makes an immediate and significant move to the upside, as with the days following the Brexit vote, often the cash holders say, “I am not getting in now since the Dow just rallied 200 points. I should have got back in yesterday. I will wait for another pullback before I buy back.” If the market goes higher from there, their stubbornness may not allow them ever to enter the market again. On the other hand, if a further decline happens, so does the procrastination, as they suggest that stocks may go even lower. I have witnessed this mentality repeatedly. Please understand that I am speaking from experience. I have been there, done that, got the t-shirt, and I have the scars to prove it!
We all know the story of Chicken Little, who ran around warning the barnyard of impending doom. I put forth that there is a Chicken Little in each of us. We get a little chicken when fear and doubt cloud our thoughts. We must accept that we are in the big leagues and scary times, and volatility is part of investing. While I have always been able to handle the market volatility and uncertainty as well as being a consummate optimist when it pertains to stocks going higher over time, I am not a wild-eyed optimist looking for unicorns and rainbows. Instead, I rely heavily on history to guide my decisions. I rely on faith, not fear! I may tweak my asset allocation from time to time or change investment strategies, but I always stay the course.
One can never accurately predict when the best days will occur, so we have to stay fully invested in experiencing the gains that we want and expect. Yes indeed, Toto, we are not in Kansas anymore. So relax and stop overthinking this investing thing. Everything should be just fine. At least that is what history has taught us.
Harry Pappas Jr., CFP®
Managing Director-Investments
Master of Science Degree Personal Financial PlanningCertified Estate & Trust Specialist ™
Certified Divorce Financial Analyst™Pappas Wealth Management Group of Wells Fargo Advisors
818 North Highway A1A, Ste 200
Ponte Vedra, Florida 32082
The use of the CDFA™ designation does not permit Wells Fargo Advisors or its Financial Advisors to provide legal advice, nor is it meant to imply that the firm or its associates are acting as experts in this field. Wells Fargo Advisors is not a legal or tax advisor. You should consult with your attorney, accountant and/or estate planner before taking any action.Although history can be used as a guide, keep in mind that past performance is no guarantee of future results. Wells Fargo Advisors LLC, Member SIPC, is a Registered Broker-Dealer and a separate non-bank affiliate of Wells Fargo & Company. This and/or the accompanying statistical information was prepared by or obtained from sources that Wells Fargo Advisors believes to be reliable, but its accuracy is not guaranteed. The report herein is not a complete analysis of every material fact in respect to any company, industry or security. The opinions expressed here reflect the judgment of the author as of the date of the report and are subject to change without notice. Any market prices are only indications of market values and are subject to change. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
