“We help you get out of the market before it goes down too much and get you back in to get most of the recovery.”
I heard those words from a respectable, well meaning, deluded investment firm. Who wouldn’t want to get in on this? Avoiding most losses while getting most gains! Eventually you’d own the world! But…if there’s nobody who owns the world…maybe this doesn’t work.
In honor of Jack Bogle Day, let’s see what his company discovered:
Vanguard examined how investors fared if they jumped out of the market because of COVID-19’s effects. As of May, about 85% of “cash panickers” would have been better off leaving their investments alone. The market has gone up 10% since then.
So, let’s be generous, the odds of jumping out and back into the market are 10 to 1 likely to hurt you. Usually you’d lock in most of your on-paper, potential losses and then miss most of the recovery.
Why do we do this? We’re easily motivated by loss aversion (“what happens if the stock market goes to zero?”) We fear losses about twice as much as we value equivalent gains. The problems with that approach is that a) it’s batty and b) it encourages you to lose in the stock market.
If the stock market went to zero that would mean all Fortune 500 companies are out of business. If that unlikely disaster happened, you’d have much bigger problems, as U.S. dollars would be worth nothing without companies to pay taxes and wages. But, unless you’ve already apprenticed yourself to an Amish farmer, you don’t believe that the market is going to zero, do you? By the time you (or an “expert”) can figure out the market is going down it’s already gone down. Your best option is to avoid losses by not selling in a down market. If you stay in the market then you’ll be there for the recovery. Again, if there’s no recovery, you’ve got much bigger problems.
When we look at short term prices we miss the reality that stock means we own part of a company and thus part of their profits. Prices rise and fall for bad reasons (“they have .com in their name!) and valid reasons (COVID-19 reduces work hours). The thing to rely on is not the mood of the moment but the fact that companies, over the long term, produce profits for their stock owners.
A better investment strategy than the “cash panickers” is to invest automatically across your working career and, upon retirement, look at your balance. About one in 4 years the market goes down. Once it was down 3 years in a row (2000-2002). If you panic you lose and you miss the eventual rally.
