There has been a lot of chatter in the news that the stocks of the 500 largest companies in the United States are just about as expensive as they ever have been by some metrics, and that investors need to be leery. With the recent volatility due to the Omicron variant, people are taking note.
What is talked about far less is that there is little historical evidence that acting on that information (by selling when things are expensive and buying when things are inexpensive) would have produced superior results over simply maintaining a steady mix of investments, according to a study done by James Davis at Dimensional Fund Advisors.1 The power of such a metric to accurately and timely predict future market moves simply isn't there.
I feel this is partly due to these truths:
Obvious opportunities are snapped up...
→ Which increases the price…
→ Which likely negates the obvious opportunity.
Obvious risks are sold…
→ Which decreases the price…
→ Which likely negates the obvious risk.
As Carl Richards astutely points out:
“Risk is what’s left over after you’ve thought of everything”.
Just think back to the perfect storm that was the 2008 Great Financial Crisis, or the beginning of the pandemic, to see his point. (Nobody saw those two things coming.)
So what is an investor to do?
1) Acknowledge and accept that, ahem, “stuff” happens.
Everyone loves growing their money at the rates that the stock market has historically afforded.
Everyone strongly dislikes the inherent short-term uncertainty that has also simultaneously existed within the stock market.
As evidenced by the Davis study and countless others, we must take the good with the bad as the bad cannot be accurately predicted ahead of time.
Embrace the fact that the risk you bear (defined as short-term uncertainty) is commensurate with your reward. These dips are literally why stock market investors earn more over the longterm.
Simply acknowledging that there always has been and always will be bumps in the road, and that you will likely be better off regardless, will take you a long way.
2) Remember to stock your war chest.
Unless it was explicitly discussed with a client beforehand, all of our clients have some amount of their money in very stable investments; their “war chest”. Even if the stock market falters, you should find solace knowing that you have money set aside that can be turned to if you need it while the stock market rebounds as it always has.
3) Remain diversified.
It’s all too tempting to take note of the best performing investments as of late (such as U.S. growth stocks), put all of your money into them, extrapolate those recent growth figures into the future, and then start planning on how you will decorate your private island.
Unfortunately, that usually ends in disaster, and the prudent thing to do is to remain diversified, even if that means owning investments that haven’t performed as well lately (because pretty much everything is cyclical in nature, and they too, will have their time to shine again).
4) Be patient.
“The stock market is a device for transferring money from
the impatient to the patient.” - Warren Buffett
Do you know how much collective worry there has been by investors over similar circumstances over the past century?
It’s hard to fathom, especially considering that it was all basically for naught.
I would encourage you to take heed and moderate the amount of news that you take in that is causing you similar worry, as I imagine history is going to repeat itself in much the same way.
Moore Financial Management, Inc. is an Investment Adviser registered with the State of Florida. Our current disclosure brochure, Form ADV Part 2, is available for your review upon request. Past performance is no guarantee of future results.
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