“The stock market is a device to transfer money from the impatient to the patient.”
- Warren Buffett
With the recent stock market volatility, it is a good time to expand upon the topic I raised in March (ominous timing), namely, how to survive a bear market. Now that we are essentially in one, which investor will you be – the patient one who ‘receives’ the money, or the impatient one who ‘gives it away’?
As the saying goes, stock markets often take the escalator up (relatively smooth, small gains over time) and the elevator down (large, quick, violent losses due to unpredictable exogenous events like a pandemic or a terrorist attack or an unexpected tweet about extreme tariffs).
Psychological studies demonstrate that humans feel far more pain (often 4X – 5X) from loss (read stocks down) than joy from gains (AKA stock price increases).
When you combine this asymmetry of joy/pain with the asymmetry of how gains/losses tend to occur in stocks (slow up, fast down) – along with our genetic disposition to fear the worst and be blinded to potential good (our survival mechanism) - this makes for the perfect cocktail of investors often taking the very wrong action at the very wrong time. The thought never crossed their mind to take profits when their tech stocks were up 100% or more (due to another emotions-based tendency to be greedy), but when that same stock drops 30%, 40% or more, then they can’t wait to head for the exits.
This fear-induced desire to sell is often driven not by any fundamentals in terms of the long-term prospects of the company, nor even any material changes to their personal financial circumstances (no sudden need for the cash), but rather on the ‘need’ to take action, to do something – anything – to feel a sense of control. But that itch to act can prove very costly as stocks rebound, only to have that investor watch the train leave the station (I know investors who have been out of the market since 2009, waiting for a train that will likely never arrive to come back and pick them up).
When emotions are heightened – whether that relates to money or relationships or any other important matter - that is usually not the time to make large, important decisions.
Big Emotions, Small Decisions.
If the itch occurs to ‘sell everything and get out!’ here are some things you can do – small actions you can take – to satisfy that desire without doing something you may deeply regret in the not-too-distant future. Unlike short term stock market prices, there are things over which you have control.
1) Cut personal costs. Pick a few things that are luxuries and cut them out. Expenses are half the income/expense equation, so if the income side is at risk, focus on the expense side.
2) Sell some winners. Assuming you are well diversified beyond just the ‘Mag 7’, you (hopefully) have some stocks that are doing just fine like T, KO and others. Of course, be tax sensitive, but at least you would be selling into strength, not weakness.
3) Shift some stocks into fixed income. Look at your cash needs for the next couple of years and consider putting that into bonds that match your cash needs time horizon.
4) Go for a walk, hug your kids, take up a new hobby, reduce the amount of time you spend looking at daily financial news.
Of course, each investor’s circumstances are unique, so work with your financial professional to take steps that are in your best short- and long-term interest. As they say when it comes to health, what is the best diet? The one you can stick to. If having more fixed income than an objective analysis would suggest you should have in your portfolio helps to satisfy the ‘sleep at night’ factor and allows you to stick to your investment program, then consider that.
To cite another saying, this too shall pass. Yes it is different in that each crisis has its own characteristics whether a financial crisis or a pandemic-induced crisis or a terrorist driven one. But what they all have in common is that humans – and strong companies – are resilient. They have the ability to adapt which is why they survive everything the world throws at them. Consider making small changes – incremental adaptations so that you too will survive another day – rather than wholesale changes you may soon regret.