Watch Jeff’s video here
As I write this Christmas Day, the markets have suffered one of their worst short term periods since 2011, with many media pundits comparing the rout to 2008, which in many ways was the worst bear market since the Great Depression.
Are we headed into the pit again? I for one don’t think so, and rather believe the worst may be over, that we are nearing the bottom for this cycle, and that it is an excellent time to buy quality stocks that are trading at bargain-bin prices, which I continue to personally do with every nickel I can muster.
I’ll get deeply into my reasons for optimism in the below article and a subsequent video. For now, it is important to discuss why I have personally remained fully invested through the carnage, and why we have counseled clients to do the same. As many readers and viewers of this report will no doubt remember, I have been expecting a sharp correction for some time, and sure enough, here we are! Many of you will ask, why did we not advise to get out ahead of it? There are two primary reasons, which are so important I would ask you make an effort to remember for the rest of your life, and to teach your children and others that you love:
- Risks of getting timing wrong are too great. Timing the market effectively is so difficult as to be impossible on a consistent enough basis to outperform the markets over time. Even really smart people with the best resources have not been shown to do it reliably. I certainly make no claim of such an ability. The costs of getting timing wrong – and it is almost certain to be got wrong if you play long enough, just like the tables in Vegas – so far outweigh the scant long term benefits of getting it right that you should never consider timing, or trust those that claim they know how. Getting out at the wrong time and missing huge upsides, or buying at the wrong time, only to see values plunge before selling at the bottom, are both mistakes that humans are hardwired to make, if they let themselves play the timing game. In the end, it is much better, simpler and more profitable to simply soldier through the slumps, keeping point number 2 in mind:
2. Invest for your lifetime, not next Tuesday. Your portfolio strategy should be based on your personal timeframe and consumption expectations. Think of investing as the storage of wealth. The longer you expect to store it before spending most of it, the better it will grow the more risk you take. Over time, the more risk you take the higher return you should make. Even if you are 70 years old, if you have a normal life expectancy your investment horizon is still 15 years or so, and if you expect to consume the entire portfolio over your life stocks should still have a significant presence in your portfolio if you want to have any real return after taxes and inflation. If the timeframe is longer or if you expect to leave a good portion of the portfolio to your heirs, stocks should comprise the majority or entirety of the portfolio. Yes, they will go up and down, scarily at times – like right now! – but in the end the odds are overwhelming that you will make more than in the alternatives if you can manage to hang on.
There are some sage adages that bear repeating at a time like this. “The biggest risk in stocks is not being scared out of them.” “The time to be greedy is when others are fearful.” “Stocks are the only thing no one wants to buy when they go on sale.”
I recognize that this is a very frightening time. My advice is to not participate in the fear. I know this is hard, because humans are very hardwired to react this way. It is baked in by millions of years of evolution. But try to overcome this instinctual fear, and appreciate that this is very normal market behavior. From down the road, what seems like the end of the world now will reveal its true nature as just a bump in a long and winding road. 2008 felt – and was! – much, much worse, but those with the gumption to stick with stocks were handsomely rewarded – double the money and more — just a handful of years later.
Stay strong, and Happy New Year!