COVID-19 (3 of 3): Did you choose the right investing path?....And my favorite Amazon Review of the Week!

Have you ever been terrified?  Are you sometimes weak?  Unfortunately, I cannot relate to you because of my heroic attributes, but I'll try my best today.  Or is it because I am a robot, devoid of all emotion?   Regardless, this post lays out some of the reasons you might feel like moving to a more conservative position, and why that is probably a bad idea.  This is the behavioral side of the stock market.  Can you resist the urge to act on emotions and instead use logic?   Discipline is the key during years like this.  You may feel an impulse to react when there is red all around.   To move to a safe haven like cash or gold.  But should you?  

Also, please scroll to the bottom if this is too boring and you would rather catch my favorite Amazon review of the week!

"You have power over your mind - not outside events. Realize this, and you will find strength.”  - Marcus Aurelius

Here are some common reasons people move to a more conservative position:

1)  The market is crashing.

2)  The market is too high.

3)  Overconfidence.

4)  The economy is doomed!  AHHHHH!

The market is crashing.

Perhaps the hardest fear to overcome happens when there is red all around.  Some system-wide issue has taken hold and prices are in a freefall.  We know that logically we should not sell low, but who can think about logic in a time like this!?

You can.  Resist the temptation to sell.  If you did, you would join the millions of other retail investors who make up the 'average investor' below.  On average people lose, and they lose big.  Dalbar produces an annual study that shows how the average investor fares versus the market by analyzing how money flows in and out of retail mutual funds.  This data is from 2018 (the 2019 data has not yet been released).  Over 30 years, the average investor has returned 4.1%.  If the investor had simply stayed in the S&P 500, they would have annualized returns of 10.0%. (1)

The market is too high.

Perhaps you believe prices have become inflated.  Maybe you correctly guessed that on 02/19/2020 that the market had peaked, and you swam to safer waters.  I have already probably given you too much credit.  It is highly unlikely you timed the peak perfectly.  You likely guessed to early and missed out on some subsequent gains before the peak hit.  But let us just assume that you timed that first move perfectly.  You know, the easy part.

When is the time to get back in?  We see + / - 10% daily swings during such times.  Good luck timing that.   The 2nd move is always the hardest - when to get back in.  

It is hard enough if the market actually continues to fall....would a 19% decline be a good time to get back in?  You would have seen that in less than three weeks.  How do you know when the trough is going to hit?

It would have actually hit two weeks later on 03/23/2020.  

At that time the S&P 500 was at a 34% decline from its high on 02/19/2020.  Trying to predict when to get back in when the market is falling is very hard.  But there is still an even more difficult scenario....

What if you were wrong?  What if prices continued to rise after you thought they were too high?  If you felt like prices were high when you got out, what about now that they are even higher?  Many felt this way at the end of 2017 as we had close to nine years of increases.  The market was up 372% from its low in early 2009.  And what would have happened if you tried to time the market, planning to sell on 12/31/2017 and buy once a correction happened?

 You would have missed out on a 25% run-up over the next two years.

Overconfidence.

Confidence is great.  Unbridled confidence in investing is very bad.  There are over 50,000 stock analysts, 150,000 CFAs, 200,000 financial advisors, and millions of individual investors in the world.  What information do you have that they are missing?  This is not David vs Goliath.  This is David vs the world.  I doubt you have enough stones.

Changes in price are only due to changes in expectations.  Remember that.  A change in expectations.  If you hear that some company is going to release a new hit product, that means nothing as far as that company's stock price is concerned.  The market already has that baked in.  The price will only change if the expectation changes (i.e. maybe you expect a delay in the product's release or that the competition will release something even better).  Changes in expectations are impossible to forecast.  If you go out on a limb and move to a more conservative allocation then that means you expect something different than the entire world.

Many of those 150,000 CFAs are active fund managers.  CFAs must pass three levels of tests covering a wide range of topics relating to advanced investment analysis, security analysis, statistics, probability theory, fixed income, derivatives, economics, financial analysis, corporate finance, alternative investments, and portfolio management.  Each of the three exam levels takes over 300 hours of study time.  Only around 40% of candidates pass any given level of the exam.  

Once they do pass, they may eventually make it to the top and become an active fund manager.  Active fund managers pick stocks or try to time the market to return better than some benchmark.  The largest benchmark and most followed is the S&P 500 - a US large blend index.  How do these active fund managers perform with their years of experience, training, and advanced education?  Very poorly.  As you can see below, over long periods of time (10 years) they are successful only 8.0% of the time.  If they charge high fees, their success rate plummets to 1.1%. (2)

The economy is doomed!

It is time to do your best Will Smith impersonation, find a dog, and start terrorizing zombies.

After you are finished flexing on those zombies, what are you going to do with all that cash you hoarded?  Our currency only has value because of the value we all see in it.  It is backed by the US government which helps.  If the economy is ending as we know it, that dollar bill is just a piece of paper.

And let us think logically about what the US government would do in a doomsday scenario.  We often forget these derivative moves.  The government would not simply sit there and do nothing.  They would inject an UNLIMITED amount of currency into the markets.  They would not just lower rates, buy long term bonds, etc.  They would start buying equities.  This is the last bazooka.  If this last-ditch effort failed, all that cash flooding the market would devalue our currency and even cash would be worthless at that point.

What about gold?  I hope you didn't buy a Gold ETF as those markets are worthless now.  So you stored it physically in your garage?  Great job.  How much gold does a loaf of bread cost?   

One of my main responsibilities is to act as a barrier to bad decisions. Investing can be very stressful, and it may seem in the moment that selling or making a move because of some scary event is wise. I hope this has proven to you how hard it is to be successful if you try to time the market. You would be jumping into shark-infested waters. It would likely not turn out well.  

Instead, we should expect and even be thankful for such volatile times. It is the REASON we are rewarded. Returns follow risk. The more risk, (hopefully) the more return.  There would be no returns without risk.  You will hopefully be compensated for these stressful times. Stay the course.  

The best course is to lower fees and taxes.  Only change your allocation because of TIME.  As you get closer to your goal, become more conservative.  And make sure you do it smartly by keeping taxes low as you move toward a more conservative path.

And now, my favorite Amazon post of the week!  Let's look at the reviews and Q&A from Clubman aftershave!

ANSWERS

REVIEWS

Sources

1) Why The "Average" Investor Is So Bad At Investing.  Nasdaq.  Published August 13, 2019.  Accessed August 10, 2020.  https://www.nasdaq.com/articles/why-the-average-investor-is-so-bad-at-investing-2019-08-13

2)  The Morningstar Active/Passive Barometer Might Help Investors Improve Their Base Rates.  Morningstar.  Published September 16, 2019.  Accessed August 9, 2020.  https://www.morningstar.com/articles/945906/the-morningstar-activepassive-barometer-might-help-investors-improve-their-base-rates

Thank you,

Matt Schwegman, CFP®, CPA

Check out our explainer video!  1st Place in the 2019 Lantern Awards for 2D & 3D animation category, Houston chapter.

ComposedPro, Inc.

708 Main St, 10th Floor

Houston, TX 77002

mschwegman@composedpro.com

(281) 705-7161

Schedule a Meeting with Matt!

DISCLOSURE: This material has been prepared or is distributed solely for informational purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Any opinions, recommendations, and assumptions included in this presentation are based upon current market conditions, reflect our judgment as of the date of this presentation, and are subject to change. Past performance is no guarantee of future results. All investments involve risk including the loss of principal. All material presented is compiled from sources believed to be reliable, but accuracy cannot be guaranteed and ComposedPro makes no representation as to its accuracy or completeness. Securities highlighted or discussed in this communication are mentioned for illustrative purposes only and are not a recommendation for these securities.