Apr 12, 2020

Investing in Turbulent Markets

Markets have gyrated wildly since the impact of COVID-19 become obvious. High to low, the S&P 500 had dropped a third before a strong rebound. You probably have to return to the Great Depression to find greater market swings in such a short period of time. I'm occasionally asked what to do in a market like this. Here is my general response.

Long before there was money and markets, the brains we live with today evolved to survive in a hunter-gatherer subsistence society. Most of these traits are still useful in a modern society (which raises another question regarding how advanced we really are). For example, following the pack provides a degree of safety today as it did nearly 2 million years ago.

However, many of our traits developed for surviving in a primitive society do not apply well to investing. For example, extreme caution when securing a food source is very applicable to pre-modern life where a month without food can end one's life. But this same loss aversion does not work well with investing where it is reasonable to make long bets with money you may not need for decades.

So in today's turbulent markets, your primitive brain may want to sell out, probably a poor long-term move. But logic that ignores some common human instincts may see new potentials in a cheaper market. Simply, buying low and selling high, a good rule of thumb for investors, is a modern investing construct but not one of our natural traits.

Also remember that market timing is mostly a loser's game, and probably even more so in today's virulent markets. Market prices are at least partially a reflection of the collective confidence of future business and profits.

There are reasonable but conflicting arguments that it will take us two years just to recover from this virus; that business will quickly return to normal; that there is no going back; that significant numbers of people will not return to their profligate borrowing, spending and busyness; that the economy will be worse than the Great Recession.

With this mix of forecasts, here are my suggestions for you. First, do not make net sales from your equities. They are relatively low and it is generally best to buy low and sell high.

If you have decided that you have taken on more risk than is appropriate, then write out what you believe your allocation should be. When the markets return to their recent highs only then make this change to your allocation. If you do wait and then hesitate to adjust your allocation, a common behavior, have a conversation with yourself as to why you are quick to sell low but then hesitant to sell high.

Second, holding is OK, and what I recommend until the markets at least stabilize. However, this could be a long wait. The 2000 dot-com market crash took nearly three years to reach its lows.

Finally, if you can do it (and this is what is probably hardest to do with our primitive brains), the best path forward is to do some periodic buying into equities while they are below their 2020 highs.

Here are some further considerations before changing your past strategies. If you can't stop yourself and you do make some transfers out of equities, I urge you to write down what you do and then check how it feels once the markets return to highs.

Consider your emotions at this time. With very real illness and death surrounding us, volatile markets are probably not your greatest fear. Excessive stress does not help us make what should be careful, long-term investment decisions.

There are exceptions to every rule. But my guess is that most exceptions are excuses to go back to bad investing choices that will probably get you the opposite of what you seek.

Finally, by historical standards, the market is still not cheap, which mixes up your options even more. Good luck and thanks for listening.