Early in my career, I worked at a large financial planning firm in which many of the older, wiser advisors mentored the younger advisors who were in the first few innings of their careers. Once a week, we would all meet in a conference room and discuss a different topic pertaining to financial planning and the younger advisors would do their best to glean wisdom from those with more experience. During one of these sessions, my boss at the time (and mentor to this day) was asked how he would communicate his portfolio management philosophy to a prospective client… It should be noted that he is the smartest guy in every room he finds himself in and he gave the type of answer one might expect the smartest guy in the room to give, which had the young advisors scratching their heads. I asked him to sum up his philosophy in a single sentence…
“Stay invested and swing at fat pitches.”
Over the years, that advice has become more and more profound as I have seen investors shoot themselves in the foot in a number of ways. However, the most frequently recurring obstable investors face is the human tendency to allow emotions to drive our decisions.
The two most powerful emotions to be aware of when making portfolio decisions are fear and greed – both are incredibly dangerous.
The greedy are typically driven by FOMO (fear of missing out) and often invest at the most inopportune times (the top of a market cycle when euphoria is at its peak). This opens them up to getting crushed when the tide inevitably turns against them.
Conversely, the fearful capitulate to their fear at the most inopportune times (when they have already suffered great loss but the fear of further suffering causes them to sell) and consequently, they miss the ride back up.
While fear and greed are on opposite ends of the investing spectrum, they are inextricably linked – both are made possible by the idea that investors can time markets.
Whether spurred by fear or greed, investors who attempt to time markets are almost certain to lose in the long run.
Timing markets requires getting out and back in at exactly the right time. Getting one of those right is unlikely, getting both right is virtually impossible. I know advisors who took their clients to cash right as the fear of COVID was settling in in February of 2020. Because they sheltered in cash to avoid the March 23rd lows, they looked like geniuses… for about five months. However, they stayed in cash a bit too long and missed the new all-time highs set by markets in August of the same year (see the chart below). All it took was five months for those who held tight and didn’t give in to capitulation to outperform those who timed their exit perfectly, but didn’t get fully reinvested before a new high was reached. Investors need to be aware that markets are moving faster than ever (as covered in this previous blog post).
The below chart from DFA perfectly sums up the potential cost of being uninvested during the best periods in a market cycle…
Missing even a single week in the span of a 25-year investment period could be a material mistake! We know we can’t afford to miss the best time periods, but when are the best investing periods most likely to happen?
In the midst of recessions.
The below chart from Fidelity shows the growth rates for investments made during recessions vs those made during periods of growth…
The math is simple – when investors capitalize on opportunities to invest (or stay invested) at lower prices, the future expected rate of return increases. Admittedly, agreeing with this logic while staring at a few charts is much different than committing to investing/staying invested in real life.
So much of the value a financial planner provides is helping clients remain optimistic in the midst of turbulent markets by preaching that the best time to invest (or to stay invested for those who are already fully invested) is when fear and pessimism are at their peak. This optimism is only made possible by having an objective, rule-based, data-driven plan in place which enables investors to anchor to data instead of emotions.
Assuming you have a thoughtful plan in place – stay invested and swing at fat pitches.
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