top 3 questions

1.Should we sell now and get back in when the dust settles?

This is perfectly understandable.  Until you’re staring down the barrel of your retirement and watching your life’s work dwindle in a matter of days/weeks, I don’t think anyone can quite understand this particular anxiety.  The scenario can make the most rational person, turn irrational.  However, here’s why this inclination doesn’t work.

According to Harford Funds research, in the last 20 years, 50% of the S&P 500’s best days came during a bear market (that sentence is probably worth a second read).  Further, another 30% came during the first two months of a bull market.  Let’s keep going.  In the last 15 years, if you missed the 20 best trading days, your annualized percentage return dropped from approximately 7% to approximately -1%.

This means that during a bear market you, by and large, sit on your hands.  You’ll likely consider rebalancing if your advisor doesn’t do so for you.  And, hopefully, you’ll keep investing money, if not more, in vehicles like your 401k.  After all, equities are typically much cheaper during this time.

Nearly all action items during a bear market are counter to our instincts but they are the makeup of champion investors: find calm, keep investing as the market declines, look for rebalancing opportunities.

2. Should we buy oil, airline, and hotel stocks?

Ok, sure.  But, that’s not the focus.

Our focus this go around has been trimming fixed income gains and buying equities on the cheap.  To focus exclusively on sectors that have been trampled even more creates a blindside for not a huge upside.

For ease of math, let’s say your investable net worth is $1m.  And, let’s say you’re keen on sectors that are down 50%.  Assume all goes perfectly, and these sectors soon return to their market highs.  What amount of money would you have to invest for that to become life changing?  $100k? $200k?  Maybe more?  And, that’s if things go perfectly.

The more likely scenario is that the stock(s) don’t perform perfectly, and 10-20% of your net worth is in an industry that’s in a world of hurt for some time.  Our rebalancing and sidelined cash from investors has been mostly directed towards balanced dividend payers.  These companies are still cheaper than they were a month ago, and have track records of rebounding.

You can play stock jockey.  Be honest with yourself, though, and write down specifically what you’re hoping to accomplish and how this will impact your life in the future if all goes according to plan.

3. I have cash.  Should we wait until the bottom to invest?

If you know the bottom, please let me know.  If not, do not waste time – for many of the same reasons mentioned in Question 1.

I stole this line from colleague, Ben Carlson, and I think it’s incredibly valuable now: “Every investor is told to buy low and sell high. But most don’t realize that buy low typically works out to buy low, then buy lower, then buy even lower, and once you really hate yourself, buy lower than you thought was possible.”

If you don’t function with this understanding of markets, you will miss those ‘top 20’ days discussed above, most of which are hidden in bear market times.  We just lose track of them because we’re busy watching our accounts go down week over week.

Also, see the chart below in reference to coming out of bear markets.  As you might recall from question 1, within the first two months of a bull market we, historically, find 30% of the best market days.

H/T Ben Carlson

One of the basic prerequisites of being an investor is believing in rebounds.  Otherwise, why invest?  Again, Hartford Funds research tells us that over a 50-year investment life, one could expect approximately 14 bear markets.  We will get through this.  We always do.

The world can only end once (I think).  At which point, we don’t need to worry about our asset allocation.

Stay calm. Stay invested.

Thanks for reading,

See disclaimers.


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