Over my long career advising clients on all matters financial, the most expensive four words I’ve heard are: “This time is different.” The reason this phrase translates as “expensive” is because, during economic downturns, many investors choose to sell into the jaws of the beast and miss the inevitable recovery. Every crisis feels like “the big one” from which your portfolio either will never recover or will only do so with the passage of decades.
So, is the current market carnage the “different” time we’ve been dreading? Let’s compare the current decline with similar market selloffs from recent history.
Being a professional investor doesn’t exempt one from sharing perfectly human fears that all investors experience. In some instances, a somewhat more sophisticated understanding of underlying market constructs—such as valuations, market liquidity, central bank monetary policy, and fiscal policy considerations—gives the professional more ammunition to fuel fears and conjure up disaster scenarios.
Personally, I experienced my greatest concerns during the 2008 financial meltdown and the onset of the global pandemic. In my weaker moments I questioned if one could reasonably argue that those times really were “different” or not. Different they were, but my years of experience, and my commitment to stay the course, allowed me to remain invested for the ultimate recovery.
That unprecedented financial meltdown raised very real concerns that the banking system could fail, with the potential to inflict collateral damage far beyond the failures of Lehman and RBS. As then-Fed Chairman Bernanke and Treasury Secretary Paulson pointed out, there wasn’t a playbook for what was happening. Fast-forward more than a decade to the early days of the coronavirus pandemic shutdown, when no one knew what the death toll would be as well as when (or whether) businesses would reopen—and if they did, in what shape they’d be. Once again, there was no playbook. Yet in both instances, sticking with your portfolio paid off. Rebalancing to your targeted asset allocation by buying into the sectors that were hit the hardest paid off even more.
Currently, the global economy is facing the dual threats of inflation and recession, along with labor shortages and the restructuring of supply chains. Thus far 2022 has been very painful, with no obvious endpoint. The difference, however, is that there is a playbook for what is ailing the economy. This time isn’t “different”—it just hurts.
Last August in this column I counseled against impulse reaction: “Market timing: Avoid the temptation to bail on equities; your portfolio will thank you.” In that article I suggested that selling out of the market is a lot easier than determining a reentry point. If investors had the proverbial crystal ball, they would have waited for the market to continue its run and sold just prior to the current decline. Then they would buy back when this bear run bottoms out.
Sounds ridiculous, doesn’t it? Attempting to call market peaks and troughs is a fool’s errand. Unless you intend to remain out of the market permanently, the wiser course of action, in my opinion, is to stay the course, and periodically rebalance your portfolio back to your targeted asset allocation. There is a great deal of data suggesting that successful market timing is extremely rare, and investing success strongly favors the disciplined investor.
The author does not provide tax, legal, financial or investment advice. This material has been prepared for informational purposes only. You should consult your own tax, legal, financial and investment advisors before engaging in any transaction.
