It has been said that history does not repeat itself, but it rhymes. What lessons from history can we learn when it comes to extreme volatility of public policy and market movements?
One obvious takeaway from the past three months is that unpredictable things can happen at any time and can upend your plans, both personal and financial.
You only have to go back five years to the once in a century pandemic to understand that this is the case. But we human beings have brains that do not like to dwell on the challenging times, which is admirable in some cases, and dangerous in others.
In fact, some of the most important lessons that we learn often occur from the near-misses and the actual bad things that happen to us.
I’m not suggesting that you live in a state of heightened anxiety, worrying that the next scary event is around the corner, but it is important to at least consider what might go wrong. That’s tough to do, especially when there’s a chorus of “the good times are here; don’t let them pass you by!”
Consider that after the presidential election, corporate executives and Wall Street strategists were almost to a person, euphoric. One sent me this text: “fewer regulations + extension of tax cuts = ONLY UPSIDE.” That consensus helped push up stock prices, with the S&P 500 peaking at 6,144 on Feb. 19. Few could imagine what might upend the positive narrative, but maybe that was not even necessary.
Perhaps the best that any of us can do is to mind the guardrails that can keep us out of trouble. Whether the economy is growing or in a recession, or markets are rising or falling, it makes sense to keep any money that you know you have to spend within 1-2 years, out of risky assets. And even if your outsized position in a stock or fund might trigger a tax event, rebalancing can help keep your allocation aligned with your risk tolerance.
The funny thing about risk is that it’s easy to gloss over when things are going well. When the mood changes and markets drop, your frayed nerves can’t stand one more minute of pain. Since the recent downturn, I have been asked repeatedly about what to do, and whether to sell out and go to cash. Notably, I did not receive these kinds of questions when stocks were rising, only AFTER they tanked. Which brings me to another important lesson from turbulent times: market timing (still) does not work.
Timing the market can be alluring. Who would not want to be the person – or hire the financial professional, who knows the exact moment when to get in and out of an investment?
But timing the market does not work because it requires two perfect decisions: when to get out and when to get back in. According to research by Charles Schwab, “the cost of waiting for the perfect moment to invest typically exceeds the benefit of even perfect timing… the best strategy for most of us is not to try to market-time at all.”
Here’s the thing: Nobody knows what is going to happen in the short term. What we do know is that over the longer term (decades not months!), those who can persevere and stick to their game plans are usually rewarded.
That’s why it’s important to make sure that you can live with your investment portfolio in good and bad times, because there will always be uncomfortable days, months, and even years ahead. The key is not timing the market, but time in the market.
Jill Schlesinger, CFP, is a CBS News business analyst. A former options trader and CIO of an investment advisory firm, she welcomes comments and questions at [email protected]. Check her website at www.jillonmoney.com.
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