It truly amazes me how predictably irrational human beings can be (myself certainly included at times).
We like to think of ourselves as logical and rationale creatures, yet our actions beg to differ. Nowhere is this more apparent than in the stock market. We have centuries of evidence that tells us that markets go up and markets go down – sometimes quite drastically. Yet we also know that every single time that markets have crashed, those who ignored the noise and held on always do better than the folks that panic. And still, this past week, the newspaper’s financial headlines were dominated with ridiculous phrases meant to press the fear button, and people responded in weird and wacky ways.
Click Here to Ignore “This Time Is Different”
Despite consistently preaching from the ignore-the-noise & investing-for-the-long-haul prayer books, I had several folks email me this week in tones ranging from very disturbed to severe panic and frustration. They had done the math and realized they had “lost thousands of dollars off of their net worth”. To these folks, it bears repeating how this whole stock market thing works. If you own shares or units (in the case of ETF or mutual fund investors) and they go down in value, you do technically have a lower net worth; however, you still own the same number of units/shares as you did the day before, and as long as you don’t need the money any time soon you can be reasonably certain that a well-diversified portfolio will continue an overall gradual ascent pattern over the long haul as it vacillates up and down erratically in the short term. This is why I've been recommending people look at robo advisors so heavily by the way – they take the emotion out of investing to a large degree!
Up, Down, or Sideways
I make it a point to try and rip off things smart people say in the hopes that I bask in their reflective glory. One such nugget of wisdom that I routinely spout originated with Preet Banerjee (or at least that’s where I heard it first) and he states that when people ask him which way a stock, interest rates, or “the market” is going to go, he tells them that he knows exactly – they will go either go “up, down, or sideways”. In other words, if you listen to people that claim they can predict where this stock market is going in the short term, you should be listening purely for entertainment value, because their largely full of BS.
Think about it like this. If there are people out there who have insider information into what the Chinese government’s overall plan is in regards to their economy – an unholy mix of government-control and free market capitalism – are they going to share it in the newspapers and 24/7 business news networks? Furthermore, if there are professional analysts who can decipher what that insider information will lead to in a broad market context, are they going to be working for a media conglomerate making middle-class wages, or tens of millions of dollars working in the investment industry? If those people exist – and I’m not sure that they do – they certainly aren’t going to give away their massive money-making advantage by sharing the information with all of us.
Consequently, to withdraw your money or “double down” based on what some talking head on TV told you to do is not a smart strategy for building wealth. It’s my personal belief that a good rule of thumb is that if you are saving money for a goal within the next five years you probably shouldn’t have the money in the stock market at all. One could certainly argue for a minor position in blue-chip stocks etc, but if you are going to need that money sooner rather than later, just have it in bonds, GICs, or even just in high interest savings account at an online bank such as Tangerine, so that you can sleep at night and to prevent the self-destruction of your portfolio.
Couch Potato Investing Is Not Black Magic
I’ve also gotten some feedback lately that can summarized as, “Hey, I was using this whole index investing/couch potato thing that you’re always talking about and my portfolio is now down 10% this year! I thought you said this stuff was supposed to be good.”
Index investing doesn’t mean that you’re going to beat your neighbour who is picking penny sticks. It just means you’re going to beat the vast majority of your neighbours who are investing in penny stocks – or anything else statistically speaking – over the long term. That doesn’t mean it’s somehow immune to the overall ups and downs of the world’s markets. The whole idea is not to time when you buy stuff or decide to “overweight emerging markets because you got a good feeling”. It’s to keep fees as low as possible while diversifying your investment capital into a wide array of places. If you claim to have bought into the overall concept, then you should admit to yourself that you aren’t Warren Buffett but that you believe that the overall markets of the world will keep going up over the long term as they have for centuries.
Everything On Sale – Today Only
Then there is the other side of the spectrum. While some of us are listening to this sky-is-falling clucking about falling knives and bears, other folks are of course throwing around random Warren Buffett quotes in order to justifying themselves saying that now is the perfect buying opportunity. Once again we run into this incentives conundrum when it comes to financial reporting. The first 24/7 business news channel that just puts on an endless loop of someone explaining what index investing is and why it’s the best solution for 99% of retail investors out there, will also be the shortest-lived business news channel of all time. Whereas if you make outlandish claims on either side of the market you are guaranteed to be quickly forgotten if you are wrong – so no penalty there – and have something grand to point to on the off chance your prediction guess turns out to be right.
The mathematical truth is this. Roughly one year ago the S&P/TSX Composite Index was hovering round 15,600. Last week it hit a low of 12,700 before finishing up 13,865. The current price-to-earnings numbers are pretty much historical averages or possibly slightly-lower-than historical average depending on what metric you’re looking at. This isn’t (at least not yet) some huge market sell off like the USA saw in 2008/2009. There is no need to go rushing into buying or selling anything.
Just stick to the plan, rebalance your TFSA and RRSP, put in your usual contribution to your Questrade brokerage account, stick to your long-term investment plan, and enjoy life. If you can’t sleep because you don’t understand the investment plan for your money, either read up a little more until you are comfortable, or getting into something safer that you can full understand. Otherwise you are doomed to become part of another statistic that shows why small retail investors almost always get it dead wrong.
And for goodness’ sake, ignore the guys in suits on TV that have never seen a barnyard in their lives, yet use farm analogies to convey what is going in countries we don’t really know much about.