The Temptation to Do Something

A few weeks ago, I wrote a piece about tempering return expectations. Link here.

The market has been on a hell of a run for the last three years (up roughly 60%), and getting back to historical average returns means either the market takes it on the chin, or it grows slowly for a number of years. History tells us it’ll be the former. But who knows, maybe this time it’ll be the latter (doubtful).

No one knows when it might happen, though. The market could take it on the chin tomorrow, or it might go on a tear for another decade (also doubtful).

In either case, I know what’s coming next for a lot of investors.

Fear

“This is the tech boom all over again! Everyone’s saying it. The market’s going to get hammered. Just like last time. Surely you can see it coming, so why don’t we pare back our risk a bit/a lot?”

If it happens soon, I am certain too many people, from economists to high schoolers, will say something like, “I knew it all along.” Funny how that always works with hindsight.

Peter Lynch said it best: you lose more anticipating a market crash than you ever will in the crash itself.

Fear of Missing Out

“This is the tech boom all over again! Everyone’s saying it. The market’s going to get hammered. Just like last time. But we’ll get out before that happens. Surely you’ll see it coming, so we’ll pare back right before it turns.”

If only it were that easy.

Funny how both emotions ultimately want you to time the market. Sorry to be blunt but thinking you can time the market is dumb.

But you’ll have a friend or family member you trust, someone you think is smarter than everyone else you know, doing something like buying bucketloads of some highly volatile stock, or waxing poetic about the Greater Depression and what they’re doing with their life savings. And you’ll want to copy that person. Please don’t.

I could go on and name every known financial bias in the book, but I don’t want to. I’ve written about them enough.

Instead, I want to talk about the temptation to do something.

If you are not yet retired.

The temptation will be to pause, or to wait for a better entry point, or to protect what you’ve built.

But every market decline in history has been a buying opportunity. Not one exception. The best thing you can do is stay invested and keep investing.

If you are retired (or close to it).

The temptation will be to move to cash, or to delay withdrawals, or to second-guess the plan you once trusted.

But your plan was built with this in mind: volatility, uncertainty, bad news. The war chest you have in place and the guardrails on your withdrawals, not to mention being appropriately diversified, are the things that exist to protect you from the temptation to react.

In both cases, what happens next will test your patience more than it will test your portfolio.

Tattoo this two-word sentence on your brain: crises end.

Doing nothing will feel wrong. It always does. But it’s how successful long-term investors separate themselves from everyone else.