– Scott Reed
In my last column I wrote about the importance of understanding your time horizon for your investments. The Center for Fiduciary Excellence says that it is the most important aspect of creating an appropriate investment plan. I would agree. So, how does that relate to what is happening in the markets today?
It’s a good question that I will try to answer. This morning I read two articles by reputable magazines that were interviewing “experts in the field.” One was explaining why we were on the rebound and were not going to test our previous lows. The other was explaining why we were going to go back down and would test our previous lows again. What do you do with that information? I am pretty sure that one of them is right. I just don’t know which one. Therein lies the problem, that it is impossible to know which one is right. It all makes sense when you look back on it, but it is impossible to see in the present tense.
Short-term market fluctuations are based almost completely on emotion. Yes, there are computer trading programs that take advantage of short-term market fluctuations but they don’t start the trend, they follow it. Short-term fluctuations are based on greed and fear, and you can’t predict the amount of greed and fear that exists at any given time until after it shows itself in the price of the markets.
What that means in simple terms is, we don’t know what the markets are going to do in the next year. It is too short of a time frame and fundamental economics will not play a major role in the outcome. Market risk is at its highest over short periods of time.
Risk is a funny thing. People tend to be scared of risk, but risk has two parts. Upside risk and downside risk. Upside risk is a good thing. I have never heard someone complain about realizing upside risk. I have never heard someone say, “You said you thought I would make 7% on this investment. I made 16% and I am pretty mad that you were wrong.”
On the other hand, downside risk can be devastating. “We were planning on an investment return of 7% and we are down 20% this year.” That happened to a lot of people in the first quarter of 2020.
I told someone this week that the worst case isn’t that the Dow Jones Industrial Average may go back down to 18,000. The worst case is if you have to sell your investments when the market is at its lows. You have to be able to ride out the equity markets when they work against you. If you don’t, then you have realized a permanent loss of capital and that is unacceptable.
The markets have never failed to rebound and we have been through some horrible times. To expect anything different during this downturn is not reasonable. Keep the money you need in the short-term safe and be willing to ride the rough seas with your long-term investments. Stay safe!
