“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” – Peter Lynch, former Portfolio Manager, Fidelity Investments
As we continue what many refer to as the longest bull market in U.S. history, the odds some economists place on a recession within the next 12 months was up around 25% as recently as January1. Some economists and analysts have sighted measures they consider as recessionary predictors (e.g., yield curve inversion, unemployment and wage growth) as indication that a recession is on the horizon; but the question of the moment for many is: 1) When will next market recession happen, and 2) If we know it’s coming shouldn’t we do something about it?
Something you might hear around our office is an Advisor mutter the worlds “all we need is tomorrow’s newspaper once and we’ll know what to do with it”. Maybe a bit flippant, but the point we try to make with that comment is that, in our belief, step one to being a successful long-term investor is embracing what is knowable and what is not. Things that are knowable are things about you, your life, your goals, fears, and general risk tolerance. What is not knowable is what the market is going to do tomorrow, or the next day, week or month. On a day to day basis the odds that one can guess the mere direction of the market (up or down), let alone the magnitude of the movement, resemble a coin flip. This reality makes attempts to time your way out of the market before a recession, and back into the market right before a recovery, quite daunting and abound with risk. And yet, it remains one of the market’s greatest temptations.
The typical attempt to time your way around market declines requires flawless accuracy at two points: The way out and the way in. The decision consists of two types of costs associated with missing the mark: 1) Market declines, which you experience if you leave the market too late or get back in too early, and 2) Opportunity costs, which you experience if you miss gains by leaving too early or get back in too late. Contrary to what you might think, it can actually be more punitive to your portfolio to mistime the market on your way back in, where missing the mark by a mere 2 months on either side of a market trough would have historically cost one’s portfolio almost 20% 2. I also find it helpful to occasionally search for news articles around troughs to remind one what the typical media environment is in the moment. It wasn’t very hard to find articles citing the end of the bull market and the predicted beginning of a market recession in December of 2018 as markets were on pace to conclude their worst December since 2008. This, naturally, was followed by the best January in 32 years3.
The more an investor can focus on designing their portfolio around the knowable and embracing the unknown for what it is, the more likely that investor avoids the emotional portfolio adjustments that can change the course of one’s financial life.
2Average Return of S&P 500 relative to historic market peaks and troughs surrounding eigh bull and eigh bear markets from 1957 through March 2010, as defined by Yardeni Research. Sources: Bloomberg, Yardeni Research, SEI.
The opinions expressed in this article are those of author and should not be construed as specific investment advice. All information is believed to be from reliable sources, however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results.
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