Investing During Turbulent Times: A Cautionary Tale

History can be a great teacher if you just pay attention.

The average investor typically underperforms the markets based on their tendency  to speculate from their belief system or level of fear. Investors, especially those who fall into the DIY sector, bank on their ability to make prudent decisions that will either prevent losses or bring great gains. The problem is, as a group, they are usually wrong.

The recent dramatic market sweep of gold prices is a great example of irrational exuberance. Even though the general belief that gold is a “safe harbor” for its ability to hold long-term value and hedge against inflation, it simply isn’t true.

Let’s begin with some basics: investors put their hard-earned dollars into an investment because of their belief that it will bring them superior gains. Over the last 30 years, there have been three recessions and over that time period, the Dow Jones Industrial Average has produced a return of 811% while Gold has returned 422%. ‘nuff said.

Recently, E-Trade reported a 267% annual increase in daily active revenue trades for the last quarter ending June 30, 2020. The DIYers are running rampant trying to solve for a murky situation that has way more questions than answers. Stock picking and market timing is not a game and should not be undertaken by the general public, regardless of their belief in their ability to make the right decisions.

History is against them—clearly. Day traders–like gamblers and fishermen—love to talk about their wins, but rarely acknowledge their losses. For all but a very few, it is a fools game to first believe you can “beat” the market and second to devote time and resources to actively try. The sheer number of variables in what can and will impact the success of your portfolio should be enough to send you running in the opposite direction.

We all want to control our wealth. But, let’s get real—you cannot control the markets, let alone the performance of a stock.

I’ve spoken with many “investors” who’ve regaled me with stories about the research, charts, newsletters and sources they use to pick stocks. Then I ask them why their information is superior to the information a seller uses in deciding to sell that very same stock. The look I get back is normally blank.

Remember, the stock you wish to buy is not sitting in a warehouse in Jersey City, waiting for you to pull it off the shelf. There must be a willing seller who decides, rightly or wrongly, that they no longer wish to own this company at the stated price. It is a matching process.

What can you do to protect yourself? Great question—so here are a few suggestions:

  • Recognize that you are not smarter than the market.
  • View stock picking and market timing as speculation and only spend that which you are willing and ready to lose.
  • Put your investments in buckets by time horizon and invest accordingly.
  • Let the markets do what they will do—you don’t need to be involved. Create well-diversified portfolios that are designed for your risk tolerance and time frame.
  • Keep your debt and spending in control. Living through turbulent times means there are many unknowns. The lower your outflow, the easier time you will have managing your finances.
  • Maintain enough liquidity to get you through tough times.  Everyone’s “enough” is different. Take into account your situation, occupation, fixed costs, debt levels, etc.
  • If the markets make you so nervous that you can’t sleep, be willing to accept a lower long-term return in exchange for lower volatility.
  • Understand where you are at risk and address those areas to the greatest degree possible.
  • Work with an objective, fee-only planner who will help you understand the issues, risks and opportunities. Having someone on your side can be very comforting.

Reduce the amount of time you devote to examining your portfolio. Checking your numbers daily or weekly is a waste of time. If history is a proper teacher, recessions end and markets will recover based on earnings and profits.

Following the ‘herd’ in the midst of challenging times might feel like the right thing to do, but usually it’s the opposite. If gold prices are soaring, when is the right time to buy? When is the right time to sell? No one is going to send you a notice.

We have lived through trying times before. Each recession is different. Each one flushes out the suckers and leaves all too many people in financial ruin. You don’t need to jump on that bandwagon.