Fear and loathing in finance…

The notes I write, here, are not generally intended to be mind numbing treatises on the deontological underpinnings of finance. That is my hope! But, given the gyrations in US Markets, this past week, I am donning my more-than-20-years-as-an-investment-advisor hat, so get some coffee, because we are going to get technical, for a minute. Let’s start with what we tend to hear, in times like these:

“Markets are volatile!” “The stock market is risky!” “Market chaos crushes Wall Street!”

These phrases might have you believe you should have whisky in your cup, not coffee.

Last week, I talked about the power of language. The words we choose shape our perceptions, AND our actions. It is no surprise, then, that headlines hungry for our attention, choose words like: volatile, risky, chaos and crush. Each one of those words is meant to elicit a response from us. Unfortunately, the actions those responses may inspire are not often in our best interest. What these words tend to sow is fear, and fear tends to make us act quickly, not questioning much, lest we end up the last one on a deckchair, as the Titanic sinks to the ocean floor.

Yes, this week, thanks to trading in specific stocks, US markets started moving. In our global economy, US market movement, begets FTSE movement, begets Nikkei movement, begets Hang Seng movement etc. You can literally watch the wave move around the world, as markets open and close, and everyone is rushing to act on what they see, and what they think they know. This is important, we will come back to this, another time. But let’s look at our chosen words, more closely, for a minute.

Volatility. This word tends to carry a negative connotation, but it simply means movement. Movement can be down or up. Some people just don’t like movement. They want as steady as they can get, so they tend to prefer so-called “low-vol” portfolios. Others see opportunity in movement, and they tend to be more comfortable in “higher-vol” portfolios. They either tend to focus on longer term trends, and not worry too much about short-term volatility, or they seek out the opportunities in short-term volatility, because in the world of investments, there are ways to profit, either way, if you have the intestinal fortitude, or enough Dramamine, to get through the ride. We will come back to this, because volatility has always been, and elevated volatility appears to be our new norm.

Risky. This word also carries a negative connotation, but in the investment world, it is meant to define your expected return. This is because EVERY single asset class has risk. Even cash. That is right, even cash bears risks. Yes, more than one. We will come back to that, I promise. For now, I will share that unfortunately, “risk” is unfairly assigned only to certain assets, and they are reputationally challenged due to misunderstanding and misapplication. Generally speaking, if we think of a risk as a spectrum, most people have been lead to believe that all stocks, at one end of the spectrum, are where all the risk lives, bonds are believed to have very little to no risk and cash, positioned at the opposite end of the spectrum, is believed to have no risk. Friends, you have been mislead. Each and every category has risks to it, and the insidious part, where I get upset, is when people are willfully mislead to believe one class has all the risk, and one class has no risk. There is no riskless asset. Period. The answer lies in diversification. We will definitely come back to this, another time.

Chaos. Now, that’s a fun little word! No question this one conjures up all manner of “slam on the brakes” feelings in anyone. But here is a little secret: chaos breeds opportunity for someone! Unfortunately, it can often be the very ones touting all the chaos. What does that tell us? When we panic and sell, they swoop in and buy good assets on sale, essentially. Because there was nothing wrong with your asset. The one that was suffering all the chaos acted like a super spreader, and just like the end of 2008, investors start chucking the proverbial baby out with the bathwater, selling with abandon, causing the market to gather speed, to the downside. There were a number of factors behind this, at that time, all compounding each other in the chaos. But year-end didn’t end the chaos. That’s right. The stock market low for the Great Recession was not at the end of 2008. It was actually in early 2009, as panicky investors sold everything, regardless, in the mistaken belief they were doing the right thing. All most people did was lock in losses, that they later compounded by missing the recovery. The other side of the trade.

Crush. Another clear connotation: get out! Get out before you are run over and squashed by the “smart money” running for the exits. Don’t be the idiot rearranging deck chairs on the Titanic! You will be crushed!! Left broken and broke. So, who exactly is the “smart money”? They would have you believe it is anyone but you. But you can be the smart money! Yes, you can!! You don’t let scary headlines drive you off your stated goal, you partner with fiduciary advisors who must and who will put your well-being, first. And you steady-on, unfazed by screaming headlines that are old news, faster than we can say: “old news.”

Here is what every single one of these headline grabbing words has at it’s root: fear. And here is the action they have in common: they have us believe that we can, and we should try to time the market. Oh look! There is that other word you know I don’t care for, if you have been reading along: should. That tricky little word is the one that leads to loathing. Because we are lead to believe we should know, and we should act, when we don’t, or we act in ways that end up counter to our true best interest, the loathing takes root. In addition, we now have the fear of making more mistakes, so we freeze. Loathing goes hand in hand with fear, and together they are especially powerful when it comes to our finances. And this is what all the foregoing leads to: attempting to time the markets.

Friends, hear me now! I am a trained, professional investor, who has done this work for more than twenty years, and timing the market does not work.

Again, for those in the back:

Timing the market does not work.

There is no such thing as successfully timing the market, consistently. And consistency is key to long term success in anything, not just our financial lives. In addition, successfully timing the market, if it could be done, requires that you get BOTH sides of the trade right. This means you get out AND you get back in, at the right moments. Every time. It would also require that you have perfect information. I guarantee we don’t have that. If we remove the twin terrors of fear and loathing, we can see we would have to be omniscient and omnipresent to employ this “strategy.” I put this word in quotations because it is not, in fact, a strategy. It is gambling. We are not gamblers. We are investors. As investors, we know risk exists in all asset classes, and we seek truly diversified portfolios that consider and compensate us for the calculated risks inherent to all matters in life, not just our finances.

I was tempted to include a handy little chart, but I have hit you with enough technical talk, for this week. We will explore many of these topics, in greater detail, in the weeks ahead, but for now, some perspective to close this week’s note: looking only at the S&P 500 index, today is not looking like there will be much green. The last five days? All in the red. But, over the past six months? A rise from 3246 to 3708, as of this writing. Over the past year? More green, 3225 to 3708. Go back five years, and it is DRAMATICALLY green, 1932 to 3708. Go back as far as my online chart allows, which is 1984, and the numbers are astonishingly green. We all know there have been down days, corrections and straight up recessions since 1984. Plural. Numerous. But when it comes to investing, the trend is your friend! Not day trading your 401k. I encourage you not to let fear and loathing get in the driver’s seat of your financial life. What I do encourage is: employing thoughtful strategy, true diversification and being guided by a plan designed with your goals as the measures of success. If you don’t yet have these things working for you, or what you do have is not working for you, Let’s Talk! and start learning what and how...