Financial advisor, Adam Grossman, has written a good article about managing your emotions when it comes to reading the popular press on markets and the economy.
His main theses are that “prognosticators don’t know the future” — as screenwriter William Goldman said, “Nobody knows anything” — and investors should stay the course.
Grossman also argues that, over time, markets have gone up. He quotes Warren Buffett saying the Dow Jones Industrial Average has gone from 66 at the start of the 20th Century to around 34,000 now.
That’s true, even if I think Grossman (like many advisors) underplays the pain markets have caused investors over periods of time that aren’t so short. For example, it took a decade or more form the late 1930s for investors in US stocks to get back to even if they suffered that decade’s big declines. Also, US stocks were basically flat relative to inflation from the mid-1960s to the early 1980s. And the S&P 500 delivered a 1% annualized loss from 2000 through 2009.
Long stretches of very disappointing performance happen. This isn’t a big deal if you’re younger than, say, 45. But it can be if you’re within a decade of retirement, to say nothing of being in retirement.
Over time, US stocks have delivered remarkable returns. Investors just need to be aware of the fact that they don’t have all the time in the world — or the length of time for which we have accurate data on US stock market returns — to overcome the bad stretches.
Grossman is mostly right. Keep your media intake to a minimum, stop the “doomscrolling,” and stick to your financial plan. But your plan has to be reasonable. That makes staying the course — not selling stocks after big declines or adding to stocks after big runs — easier.
For example, most people 5 years from retirement probably shouldn’t have, say, 80% or more of their investable assets in stocks if they’re counting on their nest egg to deliver steady income in retirement. It’s possible that some can withstand the kind of volatility that such an allocation has delivered in the past, if their savings massively outweigh their income needs. But most probably can’t.
It’s true; nobody knows the future. But that means your portfolio should be constructed in a way that makes it resilient against a variety of outcomes and considers your individual situation.
