Written by Andrew Roth, Operations Manager
“Hindsight is 20/20” or as Yogi Berra might have said—50/50. This mindset is all too familiar. People are generally overconfident in our ability to predict what will happen in the future and overestimate our ability to make good decisions. Maybe you’ve seen this behavior in your children at school, “I’ll do better next time” or “Now I know what to expect” is often heard after a setback to justify future confidence. As Mr. Berra said, “We made too many wrong mistakes.”
People can exhibit these tendencies as they manage their finances. Markets can be incredibly unpredictable (2020 was a reminder of that) and we have heard that “past performance is no indication of future results.” Despite these warnings, people still try to “time” the market. They think that by correctly buying or selling their investments they can reap all the reward without the downside. This behavior works against long term success.
Timing may look easy in hindsight. Who couldn’t have seen the Great Recession of ‘08/’09 coming? What about the indicators? “It was obvious that a market downturn was around the corner.” Because of this, the itch to try to outsmart the market creeps back in when the news cycle turns negative. It looks easy until we realize that almost no one was able to predict the severity, timeline, or the ultimate recovery of that landmark event. The same could be said about 2020’s virus-linked crisis.
The allure of market timing can be hard to resist. Even the “experts” struggle to consistently get the decisions right. Market returns tend to come in lumps, meaning that a handful of specific days have an outsized impact on investor experience. Historically, in a period of 10 years or more, missing the 10 best days can cut your cumulative return by 50% or more! Being out of the market at the wrong times can sabotage success.
Looking at a more specific example from the same period, one can analyze the behavior of investors in March 2009—the month that the U.S. equity markets finally bottomed out. That month we also saw a record number of investors fleeing stocks as they tried to stem their continued losses. They decided they could not stomach it anymore and bailed, right as things were starting to turn around. They lost sight of long-term goals, sold their portfolios, and made their temporary losses permanent.
“Knowing” when to get back in is another problem. How do we know when the storm has passed? Who knew that April ’09 was the start of our recovery? The paralysis of getting back in can be just as damaging as the decision to get out. Many gun-shy investors waited months or even years to get back into the market.
Our view is that no investor, professional or otherwise, can consistently time the market. Because people are drawn to the siren song of market timing, we believe strongly in establishing a financial plan built first-and-foremost on your goals and centered on both personal risk tolerance and time horizon. We want to control what we can control, manage risk through diversification, and keep an optimistic long-term outlook. Only when your personal circumstances change should we modify those well-laid plans.
We don’t control interest rates, the strength of the dollar, domestic politics, geopolitical turmoil, oil prices, the tax regime, or Wall Street valuations. Whatever crises we’ve recently seen, I can guarantee they won’t be the last of their kind. Using these to dictate our decisions can be damaging. We can only control our own behavior. As you assess current events through the lens of hindsight remember that “The future ain’t what it used to be.”