Gustav Mahler, the profound composer who died over a century ago, was known for his emotionally intense symphonies that have been associated with late-night listening and existential reflection.
Maybe I’m a little dramatic but investors would do well to now spend a little time in such reflection of their investments and strategies. Like his symphonies, today’s markets feel both grand and unsettling.
What Could Go Wrong?
To be kind, markets are at least volatile and into uncharted territories. A lot of investment writings the past several months have been on whether or not we're in a bubble, and what we should do about it.
Price to earnings ratios, a common measure of stock valuations, are very high. Other troubling signs include the huge capitalization levels of the largest handful of stocks making up the S&P 500 index, largely centered on technology.
These giants—known as the Magnificent Seven—dominate the S&P 500. Is this wrong? Not if their earnings skyrocket over the next several years. But that could be an expensive bet.
One of my favorite current indicators of trouble is the people now getting into stocks for the first time. Even more concerning, they’re often buying investments they may not understand.
We have amateurs who should be cautious buying into high priced stocks and sometimes into unknown investments. How about autocallable structured notes? My word checker can't even find the term.
Lessons From Three Crashes
What could go wrong?
Lots. I have lived through three market crashes: the 1987 Black Monday when the Dow dropped over 22% in one day, the largest one-day drop by percentage in the index's history.
Then came the dot-com bubble, when the NASDAQ rose sevenfold before collapsing nearly 80%. It took over a dozen years for investors to gain back these losses.
And, finally, the housing bubble of 2008 where the S&P 500 dropped 56%. I lost about half of my life savings in this train wreck.
I'm writing today to tell you two things. First, we're probably in some kind of bubble and second, if you haven't experienced losing a lot of money in a short period of time, I have no words to tell you the pain. Mahler's 9th symphony would feel upbeat in comparison.
Tips For Today’s Investor
I lied. I have one more thing to tell you, and that is to share some tips for surviving whatever the markets are doing right now.
As painful as these three bubbles and crashes were, I had few regrets during or after. We always know what we wished we had done but that is of little help for the future. So what might you do in today's markets?
I always remembered something I heard when I was a kid: Buy low, sell high. People argue this maxim endlessly but it is mostly true.
So my first tip is to not move more money into what are almost surely overpriced markets. Buying into the Magnificent Seven could look like a bad strategy down the road.
Conversely, rather than buying into overpriced equities, you may want to consider selling some of your high priced equities. But I wouldn't suggest any big market timing.
That is, selling everything while waiting for the Big Crash could look like a bad move years from now while you’re still waiting for it to happen.
This is a good time, though, to consider your market allocations. You may want to rebalance back to what you once claimed as your ideal allocation.
Of course, that probably means selling winners and buying losers, which is always hard. And if you can't, consider what you might do if your winners dropped in half in the next month.
Regardless of the promises we make to buy low and sell high, when those times arrive, we find it hard to actually sell something that has done well and buy something that isn’t doing well. People's instincts are to assume the last 2-3 years of returns will continue forever.
This is poor thinking, our Neanderthal brains. A friend of mine told me in January that he had sold most of his international funds and moved them into US equities.
Internationals have done poorly for years but have far outpaced US markets so far this year. It was a bad move this year but would have been a great one several years ago. Market timing is a proven loser.
Stay the Course
My final recommendation is that you consider staying the course. It's what my hero Ronald Reagan did early in his presidency when the US was deep into one of its worst recessions. His advisors were strongly recommending big changes.
But he believed in what he was doing, regardless of what we thought of that plan then or now. Largely because of this strategy, he went on to become one of the most popular presidents ever. It worked.
Like Reagan, investors sometimes need conviction—not because they know the future, but because they believe in their long-term plan.
Staying the course—that is, doing nothing—is often your best plan with investing. A natural response to change, good and bad, is to do something. Activity with markets is not a good default.
If you have followed some basic investing principles such as keeping to an allocation, understanding what you own, not trying to time markets, keeping five years of income you may need in a money market or other short-term fixed income assets, you are probably just fine.
Then when the markets do crash—and they will someday—be very cautious about selling anything. Remember: Buy low, sell high.
Mahler knew how to end in silence. Investors should too—sometimes the wisest move is to do nothing and let the music resolve on its own.