I’ve heard from many clients in recent weeks expressing worries about the uncertainty emanating from Washington. The concerns are understandable given the on-again/off-again tariffs, shake-up of federal agencies and major shift in US foreign policy. No one knows how all this will shake out or how it will impact the economy. One can see the stock market trying to sort it all out with big daily swings in recent weeks.
But that doesn’t mean it’s time to hit the panic button. In fact, as I’ve worked with clients now for nearly 20 years, if there is one thing that I’ve observed destroying more wealth than anything, it’s the unfortunate cases where people abruptly jump out of the market.
Although I have seen a few rare instances where individuals have gotten lucky and pulled out ahead of a downturn, I have NEVER seen someone get the second (and perhaps more important) move correct…that being, getting back into the market. In every case, the person that jumped out sat on the sidelines as the market ultimately recovered and went on to new highs leaving them worse off than if they had stayed invested.
For example, a prospective client came to me in late 2019. This individual got nervous in 2016 (remember BREXIT and the presidential election that year) and jumped out of the market. There was volatility in 2016 but over the next 3 years, the stock market surged about 50% costing this person hundreds of thousands of dollars in missed gains. Sickened by one decision that proved exceptionally costly, this individual asked me for help getting reinvested.
Unfortunately, I’ve heard a lot of these stories and surely will hear more in the future.
Bad news isn’t always bad for stocks.
What’s very difficult for many investors to reconcile is that negative news doesn’t automatically translate into a poor stock market. For example, in January 2020, if I had told you the worst pandemic in 100 years was about to unfold causing the US unemployment rate to spike to the highest level since The Great Depression, what would your stock market prediction be for the year with that information? Well, the S&P500 finished 2020 UP over 18%. My point is, even if you know what is coming, and NO ONE does, forecasting what the market is going to do is a completely different question.
Additionally, it’s counterintuitive to many, but you don’t have to avoid the periodic bear market to do well in stocks. One statistic that’s easy to remember is the Dow Jones Industrial Average was hovering around 1,000 points in the year 1980. Forty-five years later the Dow sits above 42,000. There have been plenty of big market swings along the way, including a one-day decline of 23% in October 1987. Yet, since 1980, the Dow has increased over 50 times when you include dividends. How could anyone lose money on a trend like that? Of-course many people have and it’s been my observation that a lot of the losses are a result of futile attempts to dance in and out of the markets.
One of my favorite quotes comes from legendary investor Peter Lynch. Paraphrasing, Lynch famously said, “More money has been lost by people trying to predict the next bear market (and jumping out of stocks) than has actually been lost in bear markets themselves.”
Is Warren Buffett selling all his stocks?
The financial media likes to generate headlines based on every move Warren Buffett makes. It is for good reason. While the Dow has climbed over 50 times since 1980, Buffett’s Berkshire Hathaway has increased over 2,500X earning him the “The Oracle of Omaha” moniker. Unfortunately, the reporting on what Buffett is doing is frequently without context.
It is true that Buffett did sell some of Berkshire’s stock positions last year but it isn’t even remotely close to “getting out of the market.” As noted in the annual report, which was released just a few weeks ago, Berkshire Hathaway started the year 2024 with stock holdings valued at $354 billion. After some sales the company still owned $272 billion worth of stock at year-end. And despite the sales of publicly traded stocks, Buffett noted that Berkshire’s holdings of non-public companies increased during the year.
Stocks WILL go down at some point. You need a plan.
Despite my cheerleading for investors to STAY INVESTED, I still try to consistently remind clients that historically, on average, the stock market WILL decline by roughly 20% or more every 5-6 years. That has been the norm!
But again, avoiding these periodic downturns has not been required for capturing the long-term returns the market has generated. That is very good news because as Warren Buffett wrote in his 2017 letter to shareholders, “No one can tell you when these [declines] will happen. The light can at any time go from green to red without pausing at yellow.”
If you’re in the early or middle part of your career, you should welcome the occasional big pullback because they offer the best opportunities to buy. But it’s a different story when you’re close to or already in retirement. I frequently hear the sentiment, “I don’t have time to live through another big decline and wait for the rebound.” It is true that a major market shock during retirement poses more risk compared to when you’re 40 years old. But the solution is not to bail out of the market. You need a strategy…you need a retirement plan!
Fundamentally, retirement planning is about balancing risk. Generally speaking, retirees need to maintain some stock market exposure to protect against inflation, longevity risk (living longer than you planned) or needing to spend $10,000 per month on long-term care expenses potentially decades in the future.
But because stocks can swing significantly in the short run, and jumping out of the market is a terrible strategy, it’s essential to maintain enough conservatively positioned investments or guaranteed sources of income so you are NEVER forced to sell during a declining market. If, for example, you have 5-10 years of planned retirement income conservatively parked outside of the stock market, you are in a very strong position to weather even the worst market busts in history.
Regardless of what strategy you ultimately employ, the key is having one, trusting it, and sticking to the plan because as I’ve observed throughout my career, hitting the panic button is a sure way to lock in losses and miss future gains.
A key characteristic of a good advisor.
Beyond all the technical aspects, money can be a very emotional topic. Fear and greed can lead to some really poor financial decisions. Working with hundreds of families during my career, this is something I’ve come to appreciate more with age and experience. It’s also helped me recognize one of the most important things an advisor can do for a client…give them advice they don’t always want to hear.
One of the cruel realities of investing is the right decision is often at odds with our gut instincts. When people sense danger, the most common response, especially in the context of the stock market, is to flee (sell). Counterintuitively, often when your stomach is turning because of financial headlines, that signals the best to time buy. One financial writer put it succinctly, “When it’s time to buy, you won’t want to.”
Unfortunately, when you combine the natural instinct for humans to avoid danger with the fact that most people become more risk averse in retirement, it increases the chance of making a BIG mistake. No one makes good decisions when they are fearful. This is when having a trusted advisor can be so valuable. It’s not easy telling someone to stick with the plan when the markets are falling. But the hallmark of a good advisor in any profession isn’t telling people what they want to hear, it’s telling them what they need to hear.
What’s next?
As I write this, the stock market is about 8% off its recent highs. Could it go lower? Of-course, but the real answer is no one can predict what’s next. I don’t remember seeing any headlines predicting a huge market rebound in March of 2020 when millions of Americans were getting laid off as the pandemic began to unfold, and yet, that’s exactly what happened.
The stock market has historically been a wealth creating machine but it only works if you’re invested. We know there will be stretches of rough waters because there always have been. The the key is having a plan to manage your way through and stick with it.
As captain of the financial ship for dozens of families, I intend to revisit our plans during upcoming reviews given the heightened economic uncertainty. In the meantime, if you ever need a pep talk, PLEASE reach out. As I remind myself during periods of fear and anxiety, this is when being an advisor matters most.
