Posted by John Posey
Have you ever noticed that the more volatile and uncertain the markets seem to look and feel, the less appetite you have for investing? This is purely human nature and instinctually feels like the prudent, wise thing to do – just hold out for better days, right? I mean what sort of fool would invest more in stocks at a time like now with inflation and other potentially adverse market events capable of inflicting economic damage here and around the globe? With the prospect of things getting worse before better, the broader US equity market has declined more than 20% from the historical highs this year – and there’s always a chance it will have another leg down with an even deeper low. Recession territory is defined by a broad equity market decline of 20% or more from historical highs and the particularly less frequent, bad ones have produced 50%+ declines. Some market and economic data seem to support a recession is imminent or upon us, however, some other recession indicators are not conforming with historical norms at the moment which just adds to the perplexity.
In light of this, it might feel natural to consider holding a significant cash position or going more cash-heavy in the expectation of lower values. You might equate that behavior to being “conservative” but is it really? I would contend that is one of the most aggressive stances you could take with long-term investments. I’m all for metaphorically throwing horseshoes and hand grenades of cash at market declines, however systematically attempting to hold out or sell out for a market bottom (which is only ever known in hindsight) is an aggressive and speculative approach – far from conservative and bordering with mental illness in believing you can routinely produce a winning result over just being invested (See Focus On Time Over Timing). And the more instinctive practice of investing along with the market sentiment is the classic return killer – just keep repeating until broke!
History would tell us that the market will eventually turn and there is some consistency in the feeling – often the more profound the investor pessimism, the more intense the turn. Financial evidence and emotions (rational emotions not required!) of positive momentum, as seemingly marginal as it may be, after the market’s darkest day will start the next upswing. And of course, it’s just a guess if we’ve seen it yet or not in the latest pullback just as with any market correction we’ve experienced before. The point is to recognize and accept the pattern. Heed the warning – swift reversals happen on what may initially appear to be very little positive sentiment but whether it sustains is only confirmed with the benefit of hindsight. It often takes guts, long-term perspective, and a cool mindset to seize the rarer opportunities the market presents. It’s also valuable to recognize that holding a significant pile of cash can be far from risk-free for the long-term investor, particularly in times of high inflation.
Here’s another thought that’s come to mind when contemplating investment strategy, specifically in retirement. For many successful long-term investors entering their golden years, particularly with little to modest income needs from their investments, the odds of passing on a significant portion of investable wealth is likely. Particularly if you’re conservative to the bone, look beyond yourself and consider how that approach will serve future generations and those you wish to support. Considering your own time horizon AND the time horizon of your heirs in choosing a prudent investment strategy is just part of being a good steward. This brings author Seth Godin’s words to mind, “We can always make a risk ever smaller, but the cost is that we will increase other risks. Please don’t avoid appropriate caution.” Balancing risk trade-offs with purpose and intention will make a material difference in the financial impact you make and the legacy you leave – you owe it to yourself and your family to give it some real reflection.
Experiencing the timing conundrum is inevitable when it comes to investing. Take comfort in knowing compounding returns coupled with sheer time is the long-term investor’s magic bullet and should never be underestimated. Compounding and time have proven the power to bury the existence of poorly timed investments – they often become unrecognizable years later. Market volatility creates risk but also creates opportunities – proper perspective and realistic expectations make all the difference in capitalizing on them.
Advisory services offered through Plains Advisory LLC, an investment adviser registered with the State of Nebraska. Insurance products and services are offered and sold separately through John Posey, a licensed insurance agent. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Consult your financial professional before making any investment decision.
Any information provided is designed to provide general information on the subjects covered, it is not, however, intended to provide specific legal, tax, financial or investing advice and cannot be used to avoid tax penalties or to promote, market, or recommend any plan or arrangement. Please note that Plains Advisory LLC does not give legal advice. You are encouraged to consult an attorney.