What to make of the prospect of soaring inflation, the war in Ukraine, and whatever else is keeping you awake at night.. .Part 1.
What to make of the prospect of soaring inflation, the war in Ukraine, and whatever else is keeping you awake at night..
Two Short Essays by John H. Robinson, March 5, 2022
“How should I/we react to [insert the name of the event(s) here] that is causing the stock market to decline?”
If we are ever “reacting” to events or circumstances such as the recent uptick in inflation or the war in Ukraine, then something has gone very wrong in the investment planning process. The stock market follows a random walk. Regardless of what any so-called “expert” says, no one can consistently and accurately predict the direction of the stock market from one day to the next or divine how long an upward or downward trend may last. When the stock market dropped 35% in reaction to the pandemic in February and March 2020, many “experts” predicted the market decline would last from as little as 12-18 months to as long as five years or more. It recovered in about three months. A decision to sell in reaction to events is not only a mere guess that you know the downward trend will continue, but it also requires you to discern when it is safe to go back in. Good luck guessing right twice.
A far better way to manage declines in the stock market is to plan for them in advance.
Using the past as prologue, we should all be aware that there may be times in the future when the stock market declines for a prolonged period of time. The key to investing successfully is simply to avoid having to sell when it is down. This is why you should never have short-term money in the stock market, and it is also why we encourage clients to have sufficient savings outside the stock market to wait for it to recover. If you can afford to add to your portfolio during periods of time when the market may be depressed, so much the better.
All of the above is part of a conceptual discussion I initiate at the beginning of every new planner-client relationship. From your perspective, the passage of time and the excitement of the moment make it easy for you to forget that we have been over this already. It is easy for me to remember because I have had this discussion hundreds of times and because I have had front-row seats to some of the most volatile and severe bear markets in modern history. My job is to gently remind you that we knew events like these would happen and that we already planned for them.
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