As we navigate this challenging market, we want to be deliberate about what guides our investment strategy and decisions. If we’re not careful, it could be our emotions.
I’d like to bring your attention to two helpful pieces: Invesco’s “Risk Tolerance: Facts Should Trump Emotions,” and Putnam Investments’ “Market Rebounds Outlasted Declines.”
Link to Invesco’s “Risk Tolerance: Facts Should Trump Emotions"
Take a look at “Risk Tolerance: Facts Should Trump Emotions” from Invesco. There you’ll find an illustration based on the Cycle of Market Emotions showing the common emotions a person can face during the short-term market fluctuations of a bull (rising) market and a bear (declining) market. People tend to have an overconfidence in the market at its highs and a sense of fear, panic, or even despair at its lows.
But are these emotions accurate or helpful?
They are often counterproductive. Being overly confident at the market high rather than staying disciplined can lead to being overly aggressive and accepting unnecessary risks. Likewise, being overly pessimistic during a decline can rob the investor of the opportunity to buy at a lower price. Or, if a person is even more discouraged, they may decide to sell their investments (potentially selling lower) and choose to buy again once they feel more confident that a rally is taking place (potentially buying higher). This can increase the chances they are buying high and selling low or selling low to buy higher later. Both scenarios are the opposite of an effective investment strategy.
Instead, if we thought investing for the long-term would be a good idea seven months ago, isn’t it likely now may be a more attractive time to purchase investments if the share prices are cheaper and at a lower price point? There’s an old saying that “the market is the one thing that when it’s on sale no one wants to buy it.”
It’s impossible to know exactly when a market bottom will happen until it’s already past. No one can time the market perfectly. Waiting to invest until the market rebounds may be more emotionally satisfying in the short-term, but it’s likely less beneficial in the long run.
Link to Putnam Investments’ “Market Rebounds Outlasted Declines"
Now take a look now at Putnam Investments’ piece entitled “Market Rebounds Outlasted Declines.” Remember, past performance is no guarantee of future results. I only share this with you for you to have a greater historical perspective and put the present in an appropriate context.
In the Putnam piece you see different market cycles represented by the S&P 500 Index from 1949 to 2021. Each market cycle shows a downturn, growth, and recovery. Incidentally, we find (at least historically) market rebounds have outlasted declines. Market cycles are very normal and a part of investing.
What people often fail to realize is that declines can produce the greatest opportunities to buy or rebalance. Both the Invesco diagram and the Putnam graph illustrate that some of the most lucrative times to buy were actually during downturns.
Our aim is to apply steadfast investment principles along with a disciplined approach in the context of your life and what you wish to accomplish. Simply said, helping you manage your resources for the opportunities ahead.
Sojourn well,
Sean M. Williams, CFP®