As a CFP® professional, I sometimes feel like the doctor who, when a stranger learns about his career, immediately rolls up his pant leg and says something like, “Well, doctor, while I have you here, could you take a quick look at this thing? During tough stock markets like the ones we’ve been experiencing in recent months, my “PhD” experiences have become more common. Most questions are a form of “Should I stay the course or raise this sinking ship?”
Every decision in life requires weighing the risks against the rewards, then calculating the likelihood of each outcome. The foods we eat, our exercise routine, our hobbies, our careers, and even our religion are all categorized into a “Good, Best, Best” category with a personal risk/reward calculation. When I first started flying, I discovered that a lifetime private pilot had a 2% chance of dying in their plane. This number was too high, so I did some research and found that by limiting my flight to certain conditions, I could reduce that risk to less than ½%, at which point I determined the rewards were worth it. . We best manage risk by first recognizing that it still exists.
The question on “Stay on course” begins by determining what course a person is on. If you’re sailing in the wrong direction, staying the course in a storm won’t help much. If the course is good, then I discuss the imperfect comparison of the sinking ship. When a ship sinks, it becomes a total loss. With stocks in particular, while individual companies may fail, as a whole the stock market has so far had a perfect track record to weather the storms. For example, the S&P 500 stock index since 1957 has averaged around 10% per year. The challenge is that to achieve these returns, hypothetical investors would have had to “stay the course” during very severe storms.
Often, when I’m playing doctor investor, my patient asks me, “Why not go cash until the storm calms down?” It sounds like a great idea, but it involves a serious flaw. I’ve never found anyone who can consistently predict when markets will “get better”. In fact, investors would do well to study research from the firm Dalbar (dalbar.com) which continues to show that investors who try to time market storms are often their own worst enemies. Short-term market moves (which I consider 2 years or less) are often driven by largely unpredictable events, negating the ability to time them precisely.
During an economic storm, investor emotion sometimes dominates the day, leading to the decision to stop investing until the skies clear. I appreciate this attitude because I understand investors’ desire for financial peace in their lives. But as a pilot and investor, whose life depends on managing risk, trying to forecast when regular market storms come and go can be riskier and less profitable than staying on a good course while letting the storms pass.
Dan Wyson, CFP® is the author of “The Gold Egg” and “21 Financial Myths” and owner of Wyson Financial/Wealth Management 375 E. Riverside Dr. St. George, UT 84790 – 435-986-9525 – Securities and Advisory services offered by Commonwealth Financial Network, member FINRA/SIPC, a registered investment adviser.