November 17, 2021
We plan, NOT predict.
Financial advisors are called upon to forecast the markets, the economy, and even the clients’ expected rate of return. It’s tempting to want to be a seer, however, it’s fallacy and simply, it cannot be done.
With the rise with the financial media and the internet over the last 15-20 years, more times than not, clients become overly concerned with what they hear/see/read, and we, as fiduciaries, frequently need to address the following type of query, in a responsible fashion:
Question: Is there going to be a recession/correction/bear market, and should we get out of the market until things settle down?
Often, the short answer does not put the matter to rest, but for the purposes of discussion, here it is: the market can’t be timed successfully.
Expounding on things a little bit is often only slightly more helpful: Getting out and waiting to see what happens results in far worse returns than does riding the decline out. The market cannot be timed, make no mistake about it. The only sure way to capture the full and permanent return of equities is to be fully willing to capture the temporary declines.
Question/Statement: The financial media and/or this or that person is quoting a high probability of recession/correction/bear market. What should I do?
A response may be something like: Someone is always predicting that, and this time, I suppose they may be right. No one is ever consistently right about things, but even a broken clock gets to be right twice a day. In any case, it’s irrelevant to your long-term strategy.
Any investment policy with Eaton Financial Group is based on the assumption that we can never gain a consistent timing advantage over the market. The premise is an axiom and will always remain true.
The impulse to get out just before something bad happens is innate in all of us. But it’s just that: an impulse, because getting out is at best, half of a strategy.
The impulse to get out is a natural human response. But here is the problem: in the absence of a strategy for re-entry, and this is important, you’ll have to wait until you feel the impulse to get back in. Impulses don’t make a strategy. The odds that two impulsive actions will bring you out ahead in the never-ending evolution of the market are extremely prohibitive, if not almost impossible.
Specifically, regarding the issue of a correction, remember that since 1980, there’s been an average peak to trough correction in the S&P 500 of nearly 14% each year. However, the S&P 500 came into 1980 at 106; look where it is now (about 4450). Some financial guru or media outlet telling you that there’s likely to be a correction this year is the same as saying there’s going to be heavy rainfall in the springtime. It’s as reliable as gravity. It’s a prediction that’s both self-fulfilling and meaningless. Moreover, it’s a blip.
You couldn’t have timed the bear market in between, and it turns out that you didn’t even need to.
Specifically, to the issue of a recession: since the end of World War II, the US economy has only been in sporadic recession 15% of the time. The other 85% has seen the economy growing and expanding. In the context of a lifetime, when considering multi-generation investors, recessions have historically been unexpected blips and the equity markets weren’t correlated to these blips. In general, historically, the market didn’t go up and down in tandem with a recession.
Sound advice: tune it all out. This is hard to do, but the discipline will be of great comfort and reward. The impulse to jump out and back into the market based on volatility doesn’t get you anywhere. Ultimately it takes your focus off your basic investment policy, which is to stick to the plan. We never react to the economy or markets.
Remember: as a responsible, long-term investor, we plan, never predict.
Be well and invest wisely.
Douglas Eaton is an Accredited Investment Fiduciary®, CDFA®.
Founder and Chief Investment Officer, Eaton Financial Group, Doug has provided financial advisory services to individuals and families since 1996.
Eaton Financial Group is an SEC registered Investment Adviser (SEC #: 801-122301; FINRA CRD: 316323)