We’ve had a nice nine year run up in the market. And you know you’re thinking: “what goes up, must come down”. It sure seems as though the bloom is off the rose for U.S. stock investors. And while experts disagree whether we’re in a bear market, volatility is definitely back in a big way.  I mean, look at this chart of the one year performance of the DOW (last Dec to today, Nov 29, 2018). That – ladies and gentlemen – is a roller coaster ride!

Stock indexes have fallen by hundreds of points, recovered, and then fallen out of bed again. Either you’re biting your nails or you’ve decided to avert your eyes.

The urge to sell in a rough market can be overwhelming. But selling would be a costly mistake. Remember: every seller needs a buyer. When stocks fall, someone is buying up those shares. And they’re more than happy to buy shares on sale!

Who’s buying? People and institutions that take the long view. And they’re absolutely right to do so, according to new research from the National Bureau of Economic Research (NBER).

If you’ve never heard of this group, NBER is the group that determines the official beginnings and ends of recessions. They also do a lot of other work, much of it deep-dive statistical studies of economics and markets.

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In this case, researchers looked at the performance of groups of investors in the Indian stock market. What they wanted to know was: how do the rich get richer in the stock market?

The answer, simply enough, is that they take the long view – they hold stocks through downturns. (Where’ve you heard this before?)

Interestingly, small investors who took bigger risks tended to do better in terms of return. They made more money. Yet more conservative investors, while getting a lower overall return, still did better over time. In effect, they kept more money.

Staying in the market is easy for them, you might say, they’re rich! But turn that argument on its head for a moment.

What if instead of assuming that because they’re rich, it’s easy for them to stay in the market, let’s follow the ‘scientific’ method: it’s easy to stay in because they make less risky investments. And they don’t take risks for which they are not compensated.

Chasing performance

‘Small investors” don’t want to hear this argument. That’s because most investors don’t really understand the nature of risk – as it applies to investing. Nobody likes to think they’re taking unnecessary risks, when in fact, we’re hard wired to take them when it comes to investing. Yet, you know you’d never rock climb without ropes and anchors.

Unfortunately, that’s what many small investors do. They buy fashionable stocks/funds and they chase performance – “buying/selling/moving things around because this other thing over here will probably do better”. And then they panic when markets stop going up. They also begin to question the portfolio allocation (if they know it), because right now (the last months or so), the market isn’t moving positively.

The path to riches in the stock market, frankly, is boring. It requires global diversification, steady reinvestment, or rechecking the withdrawal rates, and sticking with the investment objective — even when stocks go down.

Over time, 10, 15, 20 years, market returns are positive. And yes, you DO have that amount of time, because you’re going to live longer than you think. There has never been a time when every single asset class has been negative for up to or more than a year.  You might be remembering 2008 – a very odd duck of a year – and there were actually 2 asset classes which were quite positive.

It doesn’t feel very good – in the pit of your stomach – when the market is as volatile as this year has been. I urge you to ignore it. The pattern of history shows that after a year like this, the next few are stellar years. I expect that based on market history, though I can’t predict that; no one can. Don’t let ‘hindsight bias’ or ‘confirmation bias’ push you into any foolish moves.

Stay the course. You’ll be glad you did.

If you need a “pep-talk”, or a re-evaluation of your investment objectives, call the office and set up a time to come in and talk. Let us know if your nerves require a glass of white wine or red.   ; )