As my wife would surely tell you, I hate to shop. I’d rather three big guys took me outside and beat me up than spend a minute in the malls. But, last night after work, I drove through Miami’s notoriously bad traffic in a thunderstorm to catch Brooks Brothers annual sale on dress shirts. Now, whatever could make me do that? Well, they are offering fifty percent off on good quality shirts that I will wear for years into the future. As much as I hate shopping, even I couldn’t resist a sale.
Nothing draws a crowd like a big storefront sign that says “SALE”. People are irresistibly drawn to discounts. They even buy stuff they don’t need when it’s on sale. But, looking for discounts is perfectly rational behavior.
So, why is it that when stocks are on sale, people want to flee the market in hysteria? I don’t get it. Stocks are something you can use for the rest of your life, and buying them on discount is the smartest thing you might ever do. I mean, this isn’t rocket science. Buy low, sell high is what we are supposed to do. Hello, hello? What about this don’t investors understand? Am I not being clear?
What is it that tempts investors to buy high and sell low? Any reading of the data will show that far too many investors pour into the stock market after it’s gone up, only to flee when it goes down. They continue this pattern until they are broke and then wonder why they are not making money in the capital markets.
Right now, US Treasury Bonds are at an all time high and yields are at an all time low. The prospects for any reasonable return on Treasuries is close to zero. The downside is enormous. A rise in interest rates will devastate bond values. Yet investors can’t get enough of them. On the other hand, stocks are priced at historically very attractive prices and the upside for long term investors is compelling. Does this give you a hint about what your strategy might be?
If you are a 401(k) plan participant (or accumulating for any other reason) with more than a couple of years to go, you should be doing the happy dance instead of fretting about today’s decreased account value. Today’s prices give you an opportunity to scoop up stocks at really good prices. And, you should hope prices stay down for a good long while so you can buy more later.
If you are already in retirement and you have adequate safe assets set aside for your income needs for several years in advance, you might want to consider rebalancing, but at the very least you shouldn’t stress about the temporary decrease in stock prices. It should give you some comfort that EVERY decline in stock prices has ALWAYS been followed by a recovery and new highs. The key for retirees is having the safe assets to ride out the temporary market declines.
I’ll admit, I understand that a nasty little element of fear is always present in a market “crisis”. After 37 years in the investment business, I’ve lost track of all the crises in my career. This too shall pass, and when it does, you will be happy you saw it as a buying opportunity.
- Frank Armstrong, III, CFP, AIFA