In my long career advising clients on all financial matters, the four most precious words I’ve heard have been: “This time is different.” The reason this phrase is translated as “expensive” is that during economic downturns, many investors choose to sell in the jaws of the beast and miss the inevitable recovery. Every crisis sounds like the “big crunch” that your wallet won’t recover from or will only recover from with decades.
So, is the current market carnage the “different” time we’ve been afraid of? Let’s compare the current decline with similar market sell-offs from recent history.
Being a professional investor does not absolve one from sharing the totally human concerns that all investors go through. In some cases, a somewhat more sophisticated understanding of basic market structures—such as valuations, market liquidity, central bank monetary policy, and fiscal policy considerations—gives professionals more ammunition to fuel fears and evoke disaster scenarios.
Personally, I experienced my biggest fear during the financial meltdown of 2008 and the onset of the global pandemic. In my weaker moments, I wondered whether or not one could reasonably argue that those times were really “different”. They were different, but my years of experience and my commitment to keep going has allowed me to keep investing for my eventual recovery.
This unprecedented financial meltdown has raised very real fears that the banking system could fail, with the potential for collateral damage well beyond the failures of Lehman and the Royal Bank of Scotland. As then-Fed Chairman Bernanke and Treasury Secretary Paulson pointed out, there was no evidence of what was happening. Fast forward over a decade to the early days of the coronavirus pandemic shutdown, when no one knew what the death toll would be as well as when (or whether) businesses would reopen — and if they did, in what form they would be. Again, there was no playbook. However, either way, sticking with your wallet pays off. Rebalancing the target asset allocation by buying into the hardest hit sectors yields more profit.
The global economy is currently facing the dual threats of inflation and stagnation, along with labor shortages and supply chain restructuring. So far 2022 has been very painful, with no clear end point. The difference, however, is that there are playbooks for what upsets the economy. This time it’s not “different” – it’s just painful.
Last August in this column I advised against the impulsive reaction:Market timing: avoid the temptation to bail out stocks; Your wallet will thank you. In this article, I suggested that selling off the market is a lot easier than identifying a point of re-entry. If investors had the proverbial crystal ball, they would have waited for the market to continue running and selling just before the current low. Then they would buy back when that bear comes out of bottoms.
Looks silly, doesn’t it? Trying to call the tops and bottoms of the market a foolish task. Unless you intend to stay out of the market permanently, the wisest course of action, in my opinion, is to stay the course, periodically rebalancing your portfolio to your target asset allocation. There is a great deal of data indicating that successful market timing is extremely rare, and that successful investing strongly favors a disciplined investor.
The author does not provide tax, legal, financial or investment advice. This material has been prepared for informational purposes only. You should consult your tax, legal, financial and investment advisor before engaging in any transaction.