Doing Nothing Takes Skill and Patience
Fear
Markets do recover after scary selloffs, it’s more about “when” than “if”. Selling in a panic usually doesn’t lead to good outcomes. In the moment, getting out when things get scary brings a sense of relief. That relief ends up being temporary because the fear associated with markets fades away. How easy is it to look back at past selloffs and say, “I should’ve bought more then”? It’s easy to say after the fact because nothing’s more certain. It happened. We know the outcome.
When the market has an emotional charge to it, mistakes are made. It takes skill to be able to ignore the headlines and is incredibly difficult.
Everything in this news cycle is related to tariffs, stock market, bond market, Trump, recession, boycotts, etc. It feels relentless. The media has no shortage of bad news to dispatch to us.
Be angry or jubilant, depending on how feel about what’s going on. When it comes to making an investment decision, try to kick those thoughts out. Believe it or not, most investors are in the same situation as you. We’re all in it together.
Setting up the portfolio for future scary moments
Diversified portfolios are not immune to selloffs, but they do help lessen the blows. Imagine trying to keep up with the Magnificent 7 leading up to the tariff drama. Concentrated portfolios feel good on the way up, but they are devastating on the way down.
This year, the ACWI (All Cap World Index, orange line in the chart above) has held up better than both the S&P500 and the Magnificent 7. That’s because international was one of the lone bright spots in this tariff-based selloff.
Establish first what truly investible dollars are. Cash balances are for living, not investing. A healthy plan allows you to tap cash without touching your investments in down periods. Anything more than that needs to find a home. While it feels good to park excess cash in money markets, history shows that stocks at least keep up with inflation better.
Why the best days bunch up with the worst days
Breaking down the stock market to its simplest form is to think of buyers and sellers. Prices move when there’s an imbalance of more buyers than sellers and vice versa. After sharp selloffs, there’s sharp up days. April 9th is a good example of that. The Nasdaq notched its second biggest up day in history, though some of the gains were given back, missing that one day would’ve been devastating if an investor sold into the bear market.
Sometimes markets go up when it feels like there’s peak bad news. The world is about to end and the S&P500 is up 1%. The stock market is more of a mechanism to try to price future values in today’s dollars. If things can’t get any worse, positive days tend to show up when there’s bad news but not as bad as expected.
Be the one to take advantage of the panic
JP Morgan (the person, not the company) said, “In bear markets, stocks return to their rightful owners”. When there’s panic, there are going to be more sellers than buyers, which means stock prices fall. Strip away all the narrative and it looks like a fire sale, not a sale because of fire. If someone is willing to sell you something at a discount, happily take their asset off their hands.
Investing is inherently an optimistic activity. Look for ways to envision how it will all work out. Guess what? It always does.
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