Man sitting at New York Stock Exchange Market Analysis

Rational Thoughts for Irrational Times

Volatility can mess with your mind—always remember to focus on the big picture when things get rocky.

Have you heard? The stock market is off to a not-so-wonderful start this year. And, unlike this past summer, when a similar-sized drop had many personal finance pundits preaching passive peace, now headlines shriek of big drops ahead. Many who suggested a “stay cool” approach to your retirement portfolio earlier now suggest stocks are in for a world of hurt. Instead of the sage advice they offered then, many now ask a litany of questions that could easily skew readers off their investing course. They ask if recession is near; wonder if the bottom is in. They tell you just how many trillions the correction has thus far dinged.

Here is the thing: These thoughts can easily skew you from what matters.

I’ve been in this industry ever since I graduated college—depending how you measure them, that’s nine corrections and two bear markets ago. I’m not the most experienced person in the world, by any stretch, but I have been through this rodeo a few times before and understand how investors tend to react. When times get rocky, it is human to feel losses sharply and wonder if some form of action is requisite. That human urge will seek justification in virtually any headline.

Forget that noise.

The right question to ask today, particularly for retirement investors, is: Do you think you are going to die sooner than you did a month ago?

Ok, so maybe that is overdramatized, but it is tremendously unlikely your goals, time horizon, cash flow needs and other major considerations have radically shifted in January. More likely, market volatility has you rattled, and your gut is shouting, “Do something!”

That “something,” though, is very often counterproductive. Many studies have shown more frequent trading hurts investment results more than it helps. Trading while volatility is spiking dramatically increases the risk you sell and watch markets rise right past you—the chance you get “whipsawed,” in investing speak. It may feel good to “take action” when markets are swinging, but those feelings can have a steep price tag. I don’t know you,i or how you feel about spending money, but paying a lot for the fuzzy feeling of being a doer isn’t part of my financial plan.

If your asset allocation—the mix of stocks, bonds, cash and other securities in your portfolio—appropriately targeted your longer-term goals and objectives one month ago, chances are it still does. Deviating from a strategy likely to reach your longer-term goals is the biggest risk you take. And then, after you take that risk, you have to decide when to get back in. There won’t be an all-clear signal. That, I assure you. Now then, if your asset allocation didn’t target your goals a month ago, then your problem isn’t market volatility. It’s an inaccurate asset allocation, an entirely different consideration. You should change that regardless of market conditions. End of story.

But otherwise, your time horizon—how long you need this money to last—probably didn’t get materially shorter in the last month. Nor did Congress magically buttress Social Security, ensuring you’ll have ample income to cover your needs later in life. Interest rates have not skyrocketed, providing an easy way to outpace inflation with little risk of loss. There is no unique strategy that Wall Street or insurance companies have cooked up since last months offering high returns and no risk.ii

Now then, this isn’t an argument for a buy-and-hold or passive strategy. There are times where it makes sense to exit stocks. But they are when you have identified a trillions-of-dollars big, fundamental negative others aren’t seeing.

Widely known news loses its power. (For example, news of a merger is reflected near immediately by the affected firms. You can’t capitalize on it.) And today, the major fears—oil, China, low inflation/deflation, recession fears—are either wrongly perceived, widely known or both. Every financial newspaper around the world is littered with headlines about them. It is highly unlikely any of these sneak up on markets, to the extent the theories are even right. Is it possible there is something bigger going unnoticed? Sure! But unless you see it—unless you have a reason to be bearish—then you should be bullish.

i Probably not entirely accurate. I am sure there are some readers of this article I do know.
ii Yet I continue to see claims by some that you can get 6%, 7%, 8%, or more with little risk. Folks, when 10-year US Treasurys—widely considered to be one of the lowest credit risks in the world—yield 2%, rates that high are telling you there is more risk.