Was This Time Actually Different?

On February 26, I wrote this post about the then-current market environment.  I implored readers to avoid the urge to make drastic changes to their investment plan due to COVID-19, under the mistaken belief that “this time is different.”

From February 26, when the article was posted, to March 23, the S&P 500 promptly dropped about 28%.  Naturally, I wondered, “Was this time actually different?”

During those four weeks and since, I have spent countless hours on phone and video calls with clients.  Despite my piece looking laughably wrong over the ensuing four weeks, my message to just about everyone remained the same as far as their investments were concerned: stay the course, stick to the plan, this too shall pass.  Most took the advice, as uncomfortable as that might have felt at the time. Some clients plowed more cash into the markets, figuring the market decline presented a buying opportunity.  But other clients tactically sold a substantial portion of their equities against our advice.

Given the volatility at the time, the urge to sell was understandable; then again, you can always make the case that there are reasons the market is about to go down.  Each time someone directed us to sell equities, I asked them to come up with a plan to either declare victory (i.e., determining how far the market had to fall further before they would buy back in) or admit defeat (by buying back in at higher prices).  No one was willing to do it; everyone wanted to simply wait-and-see, and continue the dialogue until they felt it was safe to enter the stock market again.  From my experience, I knew what that likely meant – they would still be sitting in cash long after the market recovered.

Then, despite the coronavirus death toll climbing, the global economy basically shutting down, and historic levels of unemployment, the stock market rallied.  From March 23 through June 9, the S&P 500 went up 43%. Nearly every client conversation shifted from “things will get worse before they get better” to “this makes absolutely no sense!”

Reasonable minds can disagree as to whether the rally made sense or not, but that is not relevant here. The market is now meaningfully above where most of them sold, and all are left with the unpleasant feeling of not knowing what to do next.  They were all “right” in the sense that things would get worse before they got better; things did indeed get worse.  But they didn’t gain anything by being right.

Everyone probably knows someone who sold in March.  Hopefully, everyone who did so at least has a plan to re-enter the market.  For some, the best course of action would be to accept their limitations when it comes to timing the market, and target a new (likely lower) allocation to equities to work towards.  The key lesson is to find the right percentage to invest in stocks so that if the market drops, you can live with the decision to “do nothing” without losing sleep or feeling undue stress.

If your goal is to get back to your pre-COVID equity exposure, many would argue that you would be best-served just holding your nose and buying back in all at once.  However, a more realistic plan in my experience is to decide to invest a specific dollar amount into the market in periodic intervals.  There is no “right” answer here – once a month over three months can make sense for some, while others may prefer a longer period of time that traverses some big event, like the election.  This strategy reduces some of the risk of buying back in just before another big drawdown, but more than that, it alleviates a large mental barrier often faced by those who find themselves in this predicament.  With trading costs down to virtually zero, there is really no limit to how frequently one can make purchases. The most important thing is to stick to whatever plan you set, and not find reasons throughout this “re-implementation” to hit the pause button.  If anything, I would suggest that your plan includes the flexibility to accelerate purchases if the market does go down in the short-term.  Again, there is no “right” answer here – as I often say, I’d prefer a good plan that someone can stick with to a better plan that is not followed.

In my last piece, I wrote:

“Unless you believe the coronavirus is going to wipe out markets entirely…the options one has with their equity exposure are, now and forever:

1. Reduce your exposure

2. Increase your exposure

3. Do nothing”

All things considered, doing nothing was probably the best course of action.  In most areas of life, the more effort you expend, the better your results; however, investing does not work that way.  Quite often, positive results come from actions not taken, especially in the face of overwhelming pressure to act.

If you invest long enough, you will be surely required to weather additional periods of market unrest.  Here are some things we should all keep in mind the next time the market faces extreme volatility:

  • The track record of humans making predictions is terrible, yet we continue to be extremely confident in our ability to accurately do so. But humans and societies are great at problem-solving.
  • You (yes, you) are terrible at timing the market. Don’t worry, everyone is — including investment professionals.  Resist the urge to act on your personal viewpoints of the market.  You are probably wrong.  And even if you are right, you’re unlikely to implement it properly enough to profit.
  • What happens in the stock market over the next 12 months should not affect your life AT ALL. If it does, you have the wrong asset allocation.
  • There is nothing wrong with recognizing that your risk tolerance is not as high as you thought it was. Talk about this with your advisor, because it matters.  Changing your asset allocation because your risk tolerance has changed is perfectly valid.  But what happens in the stock market in the short-term DOES NOT MATTER.
  • Sitting on the sidelines with cash, hoping that the market goes down so you can buy at lower prices, is not a strategy.  Have a plan.  Hope is not a plan.

I can’t emphasize this last point enough. Have a plan. And make sure that it is built around your long-term goals and objectives. If you’d like to revisit your plan, our team is always here to help.

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