Over the years, you will have heard all of the great sports coaches say, when facing tough conditions – “We just need to stick to our game plan and not be derailed by things that aren’t in our control.” Well, it’s the same when it comes to your long-term, goal-oriented financial plans. It’s what you do in the tough conditions that counts most!
Investing in equities is always about uncertainty, not risk. That is exactly why the equity risk premium has been so high — investors demand a large risk premium to compensate them for taking uncertain “bets.” Investment education is a priority at Alman Partners, so clients are informed and avoid the mistake of taking more risk than they have the ability, willingness or need to take, giving themselves the greatest chance of staying disciplined, adhering to their well-thought-out plan. A plan that anticipates the virtual certainty that bear markets will occur and that they are unpredictable in terms of when they will start, how long they will last, and how deep they will be. This education and understanding will help avoid the mistake of letting their stomachs, and not their heads, make investment decisions.
We are yet to meet a stomach that makes good investment decisions, and the historical evidence is clear that dramatic falls in prices lead to panicked selling as investors eventually reach their GMO point — their stomach screams “Get me out!” And selling begets more selling. The general population of investors have demonstrated the unfortunate tendency to sell well after market declines have already occurred and buy well after rallies have long begun. The result is that they dramatically underperform the very mutual funds in which they invest. The stocks they buy underperform after they buy them, and the stocks they sell go on to outperform after they are sold.
Unfortunately, for those investors who sell and get out of the market “just until things become clear again” (investors begin to treat equity investing again as risk instead of uncertainty), there is never an “all clear” signal that will let them know it is safe to buy again. Once you sell, it is almost impossible to get it right again because so much of the market’s gains come in very short bursts that are impossible to capture unless you follow the advice of Charles Ellis, author of Winning the Loser’s Game: “Market timing is unappealing to long-term investors. As in hunting deer or fishing for rainbow trout, investors have learned the importance of ‘being there’ and using patient persistence — so they are there when opportunity knocks.”
Returning to the initial sports analogy, the media only stimulate tough conditions to create newsworthy content. Have you ever noticed that you never hear much about the markets when they’re going up, but when they go down, they dominate the headlines…
Being disciplined isn’t easy, but we are proud of our clients for ‘Sticking to their Game Plan’ and giving themselves the highest probability of achieving their most important goals!
Well done team!
Taken in part from Larry Swedroe’s “The Impact of Uncertainty on Investor Behaviour”
(Larry is Chief Research Officer at Buckingham Strategic Wealth and the author of numerous books on investing.)
Paul Shepherd (CFP® Professional, BEng, DipMgt, DFS[FP], AIF®) is a representative of Alman Partners Pty Ltd, Australian Financial Services Licence No: 222107.
Any information provided to you was purely factual in nature. It has not been taken into account your personal objectives, situation or needs. The information is objectively ascertainable and is not intended to imply any recommendation or opinion about a financial product. This does not constitute financial product advice under the Corporations Act 2001 (Cth). It is recommended that you obtain financial product advice before making any decision on a financial product such as a decision to purchase or invest in a financial product. Please contact us if you would like to obtain financial product advice.