Meet Market Uncertainty With a Long-Term Perspective
“Fight weak emotions with the power of logic; fight the weakness of logic with the power of emotion”
— Jocko Willink
I reached out recently to clients concerned by headlines about market volatility:
Of all correlations in financial markets, perhaps the single most powerful is the direct link between sharp stock market declines and heightened investor emotions. When you consider what’s on the line, an individual’s hard-earned money, it makes perfect sense. We love to see our money grow, but when the train we took to head north suddenly turns south, it’s easy to let our emotions take over.
It’s during these times that we find the quote above to be so applicable to us as investors. While certainly there are times when we all benefit from letting emotions be our guide, market sell-offs are not one. Instead, it’s best to “fight weak emotions with the power of logic”.
So, given the market uncertainty, what logic can we lean into? At Watts Gwilliam & Company, we have a few thoughts to offer:
- Historically, the highest short-term market returns happen as stocks recover from this kind of sell-off. It’s critical for long-term investors to stay in the market in anticipation of these days. And these days will come.
- It’s impossible to perfectly time a bottom without a lot of luck involved. Although stocks are well off their highs, there may be more downside to come. However, we do know that many of the best companies in the world are available to buy at steep discounts to their valuations (of only a few months ago).
- Every sharp market decline creates a tendency to believe that “this time is different”. While it’s true that every bear market has its own story, we also know that, eventually, the story ends the same; stocks will go higher.
- Planning, diversification, and managing time frames is critical. This is our main focus as we manage money. We know that if we properly align risk-taking with the time we have for the investment to perform, we will be okay. As we sometimes say, “there’s no such thing as a bear market if you have enough time on your side.”
As a fiduciary for your investments, we are currently looking to take advantage of this market by:
- Allocating to categories that we think are better positioned for the current environment (things like large and small-cap value stocks, municipal bonds, certain alternative investments, and others).
- Harvesting tax losses to allow our portfolios to be more tax-efficient in the future.
- Finding value in “best in breed” companies. Everything is down, so we want to be sure we own what’s best as markets recover.
- Reviewing your allocation to ensure that short-term cash flow needs are being protected with short-term assets.
- Updating financial plans to confirm that you are still on track.
On occasion, we’ll invest in certain types of real estate development projects. Often, these investments can take several years before any real return begins to be recognized. It takes time to plan, design, and construct.
With time, these investments can result in great returns, despite the lack of any noticeable success early on. We think that today’s stock situation can be looked at similarly. WE MAY NOT BE AT A BOTTOM, but if investors can properly manage short and intermediate needs, there are stock prices today that will lead to great returns over the next several years.
Approaching the stock market with a long-term outlook, similar to what would be needed in the previously mentioned real estate development example, will help you stay the course and be rewarded with great results.