Stay the Course?

As a CFP® professional, sometimes I feel like the doctor who, when a stranger learns their career, they immediately pull up their pant leg and say something like, “Well Doc, while I’ve got you here would you mind taking a quick look at this thing.” During tough stock markets like we’ve had the past few months, my “doctoring” experiences have become more common. Most questions are some form of “Should I stay the course, or bail out of this sinking ship?”

Every decision in life requires weighing risks against rewards and then calculating the likelihood of each outcome. The foods we eat, our exercise schedule, hobbies, careers and even religion all get placed in a category of “Good, Better, Best” with a personal risk/reward calculation. When I took up flying I found that a lifetime private pilot had a 2% chance of dying in their airplane. That number was too high so I researched and found by limiting my flying to certain conditions, I could reduce that risk to less that ½%, at which point I determined the rewards were worth it. We best manage risk by first acknowledging that it always exists.

The question about “Staying the Course” begins by determining what course a person is on. If you are sailing the wrong direction, staying the course in a storm won’t help much. If the course is good, then I discuss the flawed sinking-ship comparison. When a ship sinks, it becomes a total loss. With stocks specifically, though individual companies may fail, as an overall body the stock market so far has a perfect record of surviving the storms. As an example, the S&P 500 stock index since 1957 has averaged roughly 10% annually. The challenge is that to get those returns, hypothetical investors would have needed to “Stay the course” through some very rough storms.

Often, as I am playing investing doctor my patient will ask “Why not go to cash until the storm calms down?” This sounds like a great idea but it involves a serious flaw. I have never found anyone who could predict with consistency when markets will “get better.” In fact, investors would serve themselves well to study research from the Dalbar company (dalbar.com) which continues to show that investors who try to time the market storms are often their own worst enemies. Short term market movements (which I consider 2 years or less) are often driven by events that are largely unpredictable, thus negating the opportunity to accurately time them.

During an economic storm investor emotion sometimes rules the day, leading to a decision to get out of investing until the skies clear up. I am sympathetic to this attitude because I understand investors’ desire for financial peace in their lives. But as a pilot and an investor, whose life depends on managing risk, attempting to time when regular market storms will come and go can be riskier and less profitable than holding a good course while you let the storms pass.