I’ve had a lot of discussions with potential clients who are sitting in all cash. Some sold off their investments before the election, some never invested their hard-earned money because they couldn’t make a decision about when and where to invest.
It got me thinking — how can we get more comfortable taking risk and making a decision to take action with imperfect information? We can make a pros and cons list, or a decision tree with probabilities on each limb.
But investing in the market is different and here is the reason why.
As an investor, I’m taking risk (investing money) based on understanding the setup: the economy, corporate earnings, valuations, and market sentiment. While the talking heads on CNBC are yammering about the risk of higher inflation and higher taxes, the market keeps going up. Why? Because earnings have been great. People are spending money. There are a high number of job listings, but employers can’t find workers. Commodity prices are higher. So investors are worried, but consumers are happy. And as we all just experienced, everything can change on a dime.
So with my new potential clients, I lay out my methodology of getting into the market by doing something called dollar-cost averaging, then I discuss my investing thesis: Europe’s recovery is six months behind ours, tech is too crowded but longer-term it’s probably OK.
And then I come out with the one investable theme that has done well but no one is talking about: invest in metals and mining. It’s my favorite sector, and this recent blog post explains why.
This is the logical side of my brain talking, but I also realize that everyone has an emotional side of their brain which causes them to overthink investing at market highs. Yes, we can experience a pullback in the near term, but longer-term the market goes up. Companies continue to innovate and grow, and investors love investing in the U.S. stock market.
This leads me to the story of my husband’s friend who was sitting in cash for years and then finally took the plunge and invested (not with me) in January 2020. It was lousy timing as the covid outbreak turned into a global pandemic. The market plunged 30% over the next couple of months.
If he had started with $1 million in January 2020, he would have lost $300,000 in just a handful of weeks. I’m sure our friend felt like he was going to throw up. Emotionally this was terrible, and it reminded me of the song “Ironic” by Alanis Morissette — which is actually about coincidences rather than irony, by the way.
But these lyrics still ring true:
Well, life has a funny way of sneaking up on you
When you think everything's okay and everything's going right
And life has a funny way of helping you out
When you think everything's gone wrong and everything blows up
In your face
Well, as we all know now if our friend stayed the course and kept his $1 million parked in the stock markets, he would have made $160,000 last year because that’s how the market rebounded and closed the year with a 16% gain.
I can tell you if the market corrected and he hadn’t invested, the odds are he wouldn’t have invested when the world was falling apart during the lockdown. He would have been too scared to put his cash in a volatile market.
So, ironically for our friend, investing before the crisis helped him make 16% last year if he had the confidence to sit tight and not sell when everyone else was selling and panicking.
The only way to prevent someone from making a stupid emotional-driven decision is to have an advisor and a trustworthy financial plan to reassure you that you don’t have to react to short-term events. Keeping your eye on the long-term horizon is always the best bet.