It’s a Marathon, Not a Sprint
When we feel threatened, the natural response is to want to do something about it. That fight-or-flight instinct has been ingrained in us since the early days of humankind, when a rustling in nearby bushes might have presaged the imminent pounce of a predator.
But the part of our mind that focuses on survival, while valuable in other scenarios, can be highly inappropriate for investment decisions. In fact, it often causes us to make fundamentally poor choices. What we really need to do when volatility abounds is take time to contemplate the situation and make rational, long-term decisions.
Investing is a marathon, not a sprint. And it’s never been more important to understand that key concept than right now. Accordingly, we offer three tips below on how to address any economic concerns you might be feeling.
1. Review data from previous bear markets and the resulting recoveries.
Although recent market developments might be discouraging, this is far from the first steep decline in history. Remember that the market always bounces back. As the chart below demonstrates, there have been at least seven significant downturns over the past 35 years. In each of these cases, a balanced portfolio has generated an increase in returns of between 42% and 81% over the ensuing five years. Often we don’t even need to look five years out, as significant recoveries have occurred within three years and sometimes even within the first year.
Reviewing data like this provides needed perspective and combats the natural nearsightedness that can occur among investors during economic downturns. Rather than fixating on what’s happening right now, or even what might occur in the next two weeks, looking at least a year ahead almost always offers encouragement and reassurance. Alternatively, making panicked moves amid high volatility and steep declines will almost certainly lead to diminished long-term returns.
It’s important to be analytical about any portfolio shifts we might think are prudent, considering all of the applicable risks and uncertainties. If you can keep your eyes on the horizon, the likelihood of making better decisions increases exponentially.
2. Understand the intuition behind risk in markets. Generally speaking, risk in markets is counterintuitive.
As prices go higher, valuations tend to deviate from fundamentals, increasing risk. It’s actually when prices are lower that a greater margin of safety exists. Because even if the subsequent performance turns out to be less than expected, you’re obtaining the asset at a price that allows you to enjoy a reasonable return.
So as prices fall in markets, risk does as well, even though that concept can be hard to grasp. Every emotion we have might tell us it’s wrong, but rationally it’s right. That’s the essence of behavioral economics.
If you see the market declining and start selling to save your assets, the problem is that de-risking those investments in the short term invites greater long-term risk. This is because people often retreat to safety just before the market recovers, and thus miss out on increases needed to generate the returns they’ve been investing so long to realize.
3. Avoid being overly influenced by sensationalist headlines.
Yes, the news is pretty bad these days. But the reporting on it can make things seem even worse. Remember that when media outlets create headlines, their motivation is not to encourage you to make prudent financial decisions. It’s to influence you to click on their articles. The more scary and nerve-wracking a headline is, the more likely people are to click on it. That’s just human nature.
So I’d recommend trying to combat this tendency and gearing yourself toward sources with your best interest in mind, including your financial advisor or credible independent providers of market analysis. If you have questions about what some of the latter might be, definitely reach out to your advisor, who can offer some excellent resources.
Running Your Race
We understand the inclination to do something when the market is declining, and we’re always prepared to act when it’s advisable. But sometimes, the best course of action is to closely monitor market developments and make no actual changes. This is because appropriately constructed portfolios will undergo natural rebalancing through different market conditions. In other cases, the best option might be to conduct some asset reallocation based on current risk factors. But the one thing to absolutely avoid is panic selling.
Consider risks within a long-term framework and make rational decisions rather than choices dictated by heightened emotions. Remember that the current volatility and declines won’t last forever. As an investor, you should be thinking like a marathoner who needs to navigate a challenging 26-mile course, rather than a sprinter blazing through a 100-meter dash.
The finish line might be in the distance, but it’s there and can be reached with a patient and strategic approach. At Baker Boyer, we’re proud to be the coaches who help you overcome any obstacles along the way so you can enjoy a well-earned retirement.