*As seen on Forbes
I freely admit to being perhaps the world’s worst market timer. For instance, October 2008 found me in Siem Reap, Cambodia watching the market attempt to come unglued on satellite TV. My wife still hasn’t forgiven me for cutting that trip short. This Monday we were at the Salzburg Music Festival trying to enjoy the Vienna Philharmonic played Mahler’s 9th but very distracted by market events as the Chinese disrupted global finance. Another trip cut short. In case you are wondering, this time my wife is still in Austria.
Being among the world’s worst market timers doesn’t particularly upset me, because I’m unaware of anybody that is better at it than I am. Market movements are almost perfectly random which by definition means that they can’t be forecast.
I should note that Peter Lynch of the famed Magellan Fund was playing golf in Scotland during the crash of 1987. If there was anybody who should have known what was coming, it was him. Other examples abound.
If I don’t know much about the future, there is a great deal we can learn from the past. I’ve been in the financial advice business for over 40 years and endured many ups and downs, including the crash of 1987, the crash of 1989, the Tech Wreck, The Asian Flu, 911, and the near market meltdown of 2008.
More importantly we have really great data going back to 1850 for US markets. As we look at that we notice more than just a few market routs. As much as we dislike it, it’s a part of the investment process. We notice that every single time the market retreated, if investors did exactly nothing, they came out just fine. The markets recovered and went on to new highs. Investors were handsomely rewarded for their patience.
On the other hand, if investors sold during those market disruptions, the vast majority of them lived to regret it. Having locked in their losses, most of them never recovered.
I may be a pretty simple guy. If something has always worked in the past it’s a pretty good indication that it will most likely continue to work. But, if something seldom or never worked before, it’s unlikely to work going forward. So presuming only that you have an appropriate asset allocation plan that meets your needs staying the course is overwhelmingly the best course of action, and rethinking your risk tolerance in the middle of a correction is probably a very bad idea.
In spite of all the available evidence, some investors can’t help but panic. It doesn’t feel good and it seems like things are out of control. A flight to safety results with generally bad outcomes for sellers. For instance, Tuesday saw the largest outflow of funds from equity investments since 2008. And of course that was followed by a 1000 point gain in the next two days.
There are a few things investors should do during these corrections which can add value. Rebalance your portfolios and capture any available tax losses. Rebalancing is a way to buy low and sell high for that portion of the portfolio that is out of tolerance. It’s counter intuitive but a great tactic. I can’t remember a single time we rebalanced a portfolio that didn’t result in an incremental profit down the road. Tax loss harvesting is like putting money in the bank to use against future tax liabilities. It’s a little bit of lemonade when the market gives you lemons.
While I can’t predict the market, I’m sure that staying the course is the very best strategy for your financial future.