Donald Rumsfeld served as the Secretary of Defense under two different Presidents. During his second stint in 2001, he wrote a memo to the President, “I ran across this piece on the difficulty of predicting the future, written by one of the folks here at the Pentagon, Lin Wells. I thought you might find it interesting.”
This was written and sent to the President 5 months prior 9/11/2001.
-Paul R. Rossi, CFA
Once upon a time there was a Chinese farmer whose horse ran away.
That evening, all of his neighbors came around to commiserate. They said, “We are so sorry to hear that your horse has run away. This is most unfortunate.”
The farmer said, “Maybe.”
The next day the horse came back bringing seven wild horses with it, and in the evening, everybody came back and said, “Oh, isn’t that great fortune, you now have eight horses! What a great turn of events.”
The farmer again said, “Maybe.”
The following day, the farmer's son was riding one of new horses to try to break the horse, he was thrown and broke his leg. The neighbors then said, “Oh isn't that horrible?”
And the farmer responded, “Maybe.”
The next day the conscription officers came around to draft young men into the army, and they rejected his son because he had a broken leg. Again, all the neighbors came around and said, “Isn’t that great!”
Again, he said, “Maybe.”
"The whole process of nature is an integrated process of immense complexity, and it’s really impossible to tell whether anything that happens in it is good or bad, because you never know what will be the consequence of the misfortune; or, you never know what will be the consequences of seemingly good fortune." - Alan Watts
Investing can feel like a roller coaster, with so many ups and downs it can be hard to understand if what is currently happening is actually good or bad.
-Paul R. Rossi, CFA
A few pointers to help ensure you don’t endure a double-drubbing this time.
Stoicism amid market turmoil is tested hard when a tsunami of grim investment headlines and plunging stock prices hit the market.
It is Déjà vu All Over Again?
Let’s look at recent history. In 2008, the problem was
This time the causes are different, but the current conditions are very similar, investors worried about
As we've all come to understand, history doesn't necessarily repeat itself, but it often rhymes.
The effect remains the same: a double-digit drop in stock prices. Currently the S&P 500 is down over 12% and the technology heavy NASDAQ is down over 20% (official bear market territory).
Consider the mistake some investors made exiting markets in 2008-09. Or those exiting markets in March of 2020. Those investors selling locked in steep losses and often were too nervous to get back into markets as prices rebounded. The result: a double-drubbing. Here are some pointers to keep in mind in the current market turmoil.
Stocks Outperform Other Asset Classes
Even considering periods of steep decline. Investing in stocks means remaining disciplined through both good times and bad – and no formula exists for consistently timing markets to buy at the bottom and sell at the top. Investors who attempt such timing often get sub-par returns because they actually often end up doing the opposite: buying high and selling low.
As Warren Buffett has said, “Be greedy when others are fearful, and be fearful with others are greedy.”
Higher Historic Returns on Stocks Go Hand in Hand with Higher Volatility
Stock investors have been compensated historically for enduring higher volatility. Conversely, we expect a lower return from bonds in exchange for lower volatility. Pursuing higher long-term returns means accepting accompanying risk, period. Your portfolios should be based on your unique financial and personal circumstances. This conceptual purpose doesn’t change if stocks correct 10% or rise 10%. Yes, you should rebalance regularly. But don’t buy or sell in a panic. If fundamentals are little changed, lower prices make stocks more attractive, not less attractive.
Diversification Remains Key
Proper asset allocation is the one free lunch in the investment world. The magical effects of diversification – which help smooth returns over time – persist. During a massive selloff, stocks, bonds, commodities, real estate and other asset classes may all exhibit weakness, but this is a short-term phenomenon. Once we move beyond the urge to excessively sell in a panic, the benefits of diversification again become obvious.
Avoid Emotional Reactions
Your core portfolio needs to be sufficiently diversified (multiple assets classes with lower correlations) to give you the highest probability of achieving your goals for the reasons important to you. Stick to your core portfolio and look to rebalance so you remain on track long after you forget the scary headlines.
Peter Lynch, one of the most successful investors of all time said, “The key to making money in stocks is not to get scared out of them.”
-Paul R. Rossi, CFA