What should I do during market volatility?
All fear of equities in regards to long-term investing is irrational. Fear of having one’s long-term investing program materially damaged by short-to intermediate-term market events is irrationality on a grand scale.
Current-events fears, in particular, are fertile soil for irrationality.
You can absolutely never become a good investor by watching current events.
But you can almost always become a great investor by watching history.
Equities are risky, and I’m afraid of losing money.
Again, it is human to be afraid of “losing all your money” a few years out from retirement. That fear was bred into all of us. Feel those feelings but don’t ACT on those feelings. Don’t stop being afraid, if you don’t want to stop.
Just do one thing for me (and for yourselves):
Try to be about 19 times more afraid of outliving your money than losing it, OK?
My retirement is close, so what about fixed income plans?
It’s human to be afraid of losing your retirement money when it’s on the horizon.
At the same time, a fixed-income investment strategy over three decades of rising living costs in retirement is a non-starter.
Exposure, and a lot of it, to a rising stream of dividends is critical to not becoming destitute and dependent in the last third of one’s life.
One doesn’t have to LOVE equities. One just needs to see that nothing else will really support a long retirement with no compromise in lifestyle.
I need less money in equities, according to the 100 – age rule
The “100 minus your age = amount of equities you should hold” advice has been dead a long time. But it used to work. Lets go back a couple of generations.
In 1966, when this (for some reason it is still) “conventional” advice was common. Let’s meet the scenario/person who proliferated this thinking.
We will call him Joe Average. We join him on his day of retirement, which in 1966 for the average male was age 65.
On that day, he, statistically, had less than eight years to live.
That, alone, should smack you in the face of why that advice used to work. Today, the average retiree will experience a 30 year retirement.
Joe Average’s cost of living rose only slightly until his death. Yours will rise 2.5+ times.
Shouldn’t I wait for the market to go up?
Desire for market movement is counterintuitive.
The world says “Buy now! The market’s going up!”
1) Demonstrating how little they know about investing and the REAL work of wealth building.
2) Reminding everyone with ears what pandering sounds like.
They don’t know if it’s going up. No one does. They’re just trying to stampede folks into a false sense of immediacy.
The reason to buy equities is never what the market is going to do next.
But what the market is ULTIMATELY going to do.
Okay I need your help, but the time to invest isn’t right now because the market is going down.
Most advisors talk about “good markets” and “bad markets”
We talk about efficient markets.
They teach clients to move in and out, trying to time the ebbs and flows
(Which no one can do consistently)
We teach embracing the cycle of TEMPORARY downs and PERMANENT ups as an organic whole.
Every single news anchor is saying the market is going to hell, what should I do?
If you want the kinds of returns that equities have historically provided, you must accept the kinds of gut-wrenching declines which the equity markets have historically experienced.
It’s a package deal.
These historical returns are crucial to help answer the one question that matters:
Will you live the last third of your life destitute and dependent on the government and/or your children or not? Our clients can confidently say “I will not.”
Bonds are safer, shouldn’t I have them? Or at least diversify into them?
We can’t tell people whether it’ll be better to be in equities or bonds over the next 12 months.
But we can assure them that it will probably be twice as good to be in equities rather than bonds over their investing lifetime.
By taking a planning-oriented, lifetime (if not multigenerational) approach,
It’s not just better, but it vastly increases the number of outcomes you can predict with reasonable confidence.
For example… “We just received a lump sum (legacy, sale of a business, whatever). Shouldn’t we invest it gradually over a year or two, to minimize the risk of buying at a market top?
The shortest possible correct answer is “No.” The slightly longer correct answer is “No, because you’re not really hedging; you’re making a bet in which the odds start out at three to one against you.”
To elaborate, the equity market has historically gone down nearly a third on average of every five to six years. Thus, in commendable prudence, folks seek to minimize the risk fo walking into one of those periodic buzzsaws wit the largest chunk of change they’re ever likely to see in one place.
The intuitive response is to want to stage the money into the market over, for example, 12 months. The problem arises when you consider that, in all the rolling 12-month periods since the beginning of 1926 (and there have been over 1,100 of them) the market’s return with dividends reinvesting has been positive about 75% of the time.
So, for that strategy to yield a superior outcome, the next 12 months have to turn out to be the one period out of four where the market produces a negative return. In plain English: the day you start the 12-month program of gradual investing, the historical odds of it working are three to one against you.
And then it gets worse. Because as time leaches the volatility (the temporary declines) out of equities, the odds against profiting by staging in gradually get longer. I can’t remember what the results are over all the rolling 24-month periods, but at 36 months it’s close to 84% positive. That would mean (and you’re probably way ahead of me on this) you’d historically have a 16% chance of being “right.” In the larger sense, it means that the longer the staging-in period you choose, the greater the historical odds against you.
That’s the rigorously correct analytical answer, and it’s why I’d never recommend investing a lump sum gradually into equities. In the same breath, I don’t minimize the emotional stress you’d be bound to feel if you choose the “wrong” time to invest it all at once. But I have to stand firmly on the great truth that in the long run, there is no wrong time to invest in mainstream equities.