In light of Friday’s dramatic drop in the Dow Industrials and the other broad indices in the US many retail investors are concerned and looking for guidance. People have become very comfortable with the bull market in equities and have learned to live with low interest rates in the bond markets.
Despite reasonably strong corporate earnings and a large tax cut aimed at assisting businesses there has been a decline in the markets that has given away most of the gains that followed the tax cut. True there has been an indication of some inflationary pressures but that is exactly what regulators and stock gurus have been hoping for as evidence that markets can stand on their own without the immense government support that was required to bring us out of the “Great Recession”.
What do we tell those people who rely on us to help them decide what to do?
First and foremost is don’t sell. A time of great volatility and a decline in the markets is the last occasion in which to make sales.
Look at your risk tolerance. Is your asset allocation one that you consider appropriate now that you are seeing markets can go down as well as up? The risk allocation decision is one of the most important drivers of good outcomes. If you feel the need to make changes this can and should be done gradually and at a time when short term pressures have abated.
Understand that it is perfectly normal for returns to decline to a level that is closer to the average return for stocks over time. The term that is used by the professionals is reversion to the mean.
Try to control the things that an individual can control. By this I mean look at your asset allocation as I discussed. Consider your time horizon. When do you expect to need the funds that are invested? Are there short term needs or are these savings for retirement and you are 30 years old? The answer to those questions will influence your risk and asset decisions.
Decide if you need help in managing your investments. Yes this costs money but if you end up with a better outcome it is money well spent. Just as one sees a doctor for medical problems or an accountant for tax or business help a good investment professional can assist you in making better investment decisions.
None of these are new or original ideas. However, Charles Ellis one of the best known investment professionals of our era states the following:
“…Investment management has become a loser’s game… In a winner’s game, the outcome is determined by the correct actions of the winner. In a loser’s game the outcome is determined by the mistakes made by the loser.”
(Ellis, Charles “Winning The Loser’s Game” Seventh Edition p3)
To the extent you make fewer mistakes than other investors you become a winner in the loser’s game.