When ‘Staying the Course’ becomes painful

By March 13, 2020May 6th, 2021News, PFA Ponderings

We aren’t different from the vast majority of financial advisors when we recommend avoiding knee-jerk reactions to market movements.  History has plenty of market meltdowns, a number of which we’ve been through.  Up to the current market disruption caused by dual factors of COVID 19 and a price war in oil, we’ve put up a pretty impressive percentage of market crashes that have been followed by market recoveries:  That number is 100%.

In the heat of a market panic, (and as of today, I think panic is a valid word) fundamental valuations are difficult to calculate, so emotion does take over.  This is a constant.  This is to be expected.

Despite that, studies routinely show that average investors do not come close to achieving market returns (stock market OR bond market) historically, and that is universally understood to be the result of exactly those emotions.  It’s for this reason that we who manage the money preach staying the course.  In the end, that’s the only way we close the gap between individual performance and that of the markets in which they invest.

To be concise, a fellow Maine asset management firm recently released a communication that contained the following good advice:  “Don’t touch your face.  Or your 401(k).”

It’s easy to tell yourself that you’re going to stay the course.  It’s even relatively easy to prove to yourself your ability to do so when the market starts to drop.  But it’s after that drop begins to accelerate, after the good news is nearly nowhere to be found, after you have done everything right and your account is still going in the wrong direction that you’re bound to start wondering…. Is ‘stay the course’ really sound advice?

Is ‘Staying the Course’ a sign of ignorance?  Answer:  NO. Most big money (pensions, endowments, etc.) managed by the smartest people in the business remains largely invested during market meltdowns.  These are people who, like you, didn’t ‘know’ this was going to happen and certainly don’t know when things will turn around.  Most of these people are fiduciaries, and speculation on such short-term (and ultimately un-knowable) market directions is counter to their obligation.

Is ‘Staying the Course’ the same as ‘Paralyzed With Fear’?  Answer: NO.  While you’ll often see ‘deer in the headlights’ looks from professional money managers (we get stressed out, too!), we are still applying the same disciplines we started out with.  We still buy and sell.  We may limit buying during volatile times, but that is a decision we make not out of emotion but rather as a policy we’ve set earlier on.  In other words, we make the rules on when we will sell a position during times when the market isn’t stressed, and we follow those rules.  If you manage money on your own, this is the time to continue to adhere to the standards you set in the first place.  If you don’t have such standards, wait until the market is calm for a period and set some up.

Is ‘Staying the Course’ a sign of laziness or foolishness?  Answer: NO.  In fact, the opposite is true.  The easy thing is to scratch the itch by abandoning your investment strategy.  It might even feel good at the time that you’ve done what you can to ‘stem the bleed.’  Staying the course is a tough discipline.  Not doing so is often a foolish decision.

As advisors, we’re not immune to the physical stresses that come from market dives.  I’ve heard parents say that they’re only ever as happy as their saddest child.  I think the same goes for advisors with their clients.   Disconnecting from the minute-to-minute news and market coverage can be very useful.  Also helpful, I’ve found, are yoga, meditation, eating really healthy foods and exercising.   These aren’t things I’m usually known for, but I find them invaluable during volatile markets.  Take care of yourself, and you’ll be more likely to have the mental clarity to make the correct decisions and avoid pitfalls that become very tempting at times like these.

And don’t hesitate to call us.  We love having someone to talk to!