Given current conditions, should you buy or sell stocks?
The first quarter of 2013 marked the four year anniversary of the low point for the world’s stock markets during the financial crisis and market panic of 2008/2009. Just a few weeks ago, the Dow Jones Industrial Average closed above 14,000 for the first time since October 12, 2007 and set a new all-time high. The media coverage of this was once again predictably contrasting and sensational. Many articles are emphasizing the question “Given current conditions, should you buy or sell stocks?” This is the wrong question.
Given current conditions, should you buy or sell stocks? This is the wrong question.
Over the past four years, the economy has been weak at best and faced many threats: the European debt crisis, the U.S. debt ceiling debate and credit downgrade, a contentious and polarizing election, and the purported disaster that would ensue from the “fiscal cliff.” Now, stories are appearing which suggest that after four years of being told the market cannot advance, investors are tired of the doomsayers and are now reentering the stock market. The data shows money flowing back into mutual funds that hold stocks. Some think these recent deposits mark the end of the outflows that ensued since the ‘08/’09 decline in stock markets. Unemployment is down, things have settled and people are more confident. According to the quoted sources, it is once again safe to go back into stocks.
There have also been an abundance of stories touting the opposite conclusion. As attention turned from the “fiscal cliff” and on to sequestration and the banking crisis in Cyprus, nervousness grew. Some pundits say stocks are up because interest rates are so low, an artificial condition created and maintained by the Federal Reserve. As soon as inflation ticks up or some other catalyst like a botched bank bailout in Europe happens, interest rates will spike and stocks will plunge. According to the quoted sources, it is clear that the markets are more dangerous than ever.
So, one side says hit the gas while the other says hit the brake. What should you do now given today’s uncertainty? Good investors have learned that this is not even a question worth asking. There are three main reasons why: the contradiction of opinion is neither new nor unusual, trying to make money by anticipating market moves is not effective, and the near term is irrelevant to long term success. We’ll examine each of these more closely.
The contradiction of opinion is neither new nor unusual.
At every point in time, there are people crying doom and others touting boom. It has to be this way because one cannot buy anything unless someone is willing to sell and one cannot sell unless another is willing to buy. The only thing that changes is the intensity, or rather our perception of the intensity, of these contrasting opinions. We can help ourselves by remembering that the market pays no attention to our personal feelings. If following the news makes you think there is little risk in the market, or that the risks are enormous, take it as a reminder that news reports are more likely to get you thinking about the short term than they are to make you money in the long term. Your expectation should always be that stocks can rise or fall, sometimes dramatically, and it doesn’t matter why, it just matters that sound decisions are made. When stocks fall, the best course of action is almost always to hold them or buy more. When stocks rise strongly, the best course of action is almost always to hold them or sell some.
Trying to make money by anticipating market moves is not effective.
If ever there were a period of time in which moving money in and out of the stock market in anticipation of economic, political and market events could have paid off, it was the last 5-15 years. With two 50% declines, followed by two full recoveries, the possibility for outsized gains from prescient timing was enormous. But looking at the results from mutual funds, separate accounts, hedge funds, newsletters, endowments, pensions, and other money managers with verifiable records, one clear conclusion can be drawn: over time, the most likely outcome from trying to out-maneuver the market is an inferior result. Any success is short lived and the more notable the success, typically, the more notable the ensuing failure. Four years ago, hedge fund manager John Paulson was a media darling, having followed up a strong 2007 with bold predications about a collapse in the financial market. He sidestepped the market drop and made 6.28% in 2008, according to gurufocus.com. Unfortunately, his bet big approach cost his investors over 24% while U.S. stocks gained over 48% from 2009-2011. In 2012, the S&P gained over 16% and Paulson lost 25%.
The near term is irrelevant to long term success.
Irrelevant is such a strong word. How could today’s conditions be irrelevant? Simple. The best reason to own stocks is because you may need to spend money many years from now and stocks have a spectacular record of staying ahead of inflation over extended time frames. If you own stocks for that reason, you aren’t counting on your stocks being worth any particular amount next month, next quarter, next year, or five years from now. The relevant question today is, “Based on the goals I have for my family, how important is it that our assets keep pace with inflation?” The answer to that question should drive the decision about how much to have in stocks. This is not the kind of question to which an answer changes frequently or emotionally. Neither should your allocation to stocks.
What to do next.
The markets have finally recovered from the worst financial conditions since the Great Depression. This is a great time to revisit the real question and make any adjustments to your long term plan. Not because it is time to hit the brakes or gas, but because your goals have changed. Give us a call and we will explore the possibilities together.
