I hear this phrase regularly from my kids when they are explaining how inequitable it is that one of them gets something and another doesn't or some similar grievance. You also hear a similar refrain when it comes to the current stock market situation. Given the tangible economic devastation throughout our real economy, with unemployment at levels not seen for decades and local businesses shutting down right and left, how is it that major US stock indices are at record highs? Indeed, there does seem to be a major disconnect between Main Street and Wall Street, but this is not as unusual as you may think.
In life, let alone the stock market, there are countless examples of how things 'should' be one way, but actually are something else. The best kid doesn't always win the talent show, the candidate with the most votes doesn't always win the election, and stocks that should be worth far less based on fundamentals can keep rocketing higher and higher (think of stocks like Pets Dot Com back in the late 1990s).
Investors with deep experience and highly rational brains recognize the following:
- In the near term, there can be – and often are – disconnects between the long term fundamentals and short term price action.
- Over time, fundamentals matter, not the headlines or noise of the day.
- There are many misperceptions – based on biases – )like democrats are bad for stock and republicans are good for stocks) – that are simply not borne out in statistical facts.
But most investors fixate on the near term, feel the need to be right 'now', and let their inherent biases rather than facts drive their investment decisions. When you are in a situation where you are experiencing frustration as to why something does not line up with what you think should be happening, consider putting it into the framework described above and do a critical analysis to challenge your thinking. This will help you to make better investment decisions over time.
This Spring we sent out a video from Coastwise Financial Advisor Laurie Itkin regarding the merits of staying the course when the proverbial stock market waters get rough. We have updated that video to reflect what has actually happened since that time (See Ms. Itkin's Video). Not surprisingly, as demonstrated in the previous video based on past market declines as of that time, the bear market of 2020 was no different. Those who sold in a panic did the worst, those who held on did far better, and those who added to their accounts did better still. Of course each investor's circumstances are different, so it is important that you work with a professional to discuss your specific conditions, needs, and goals.