I Manage Money for a Living. Here’s What I’m Telling My Clients.
(Bloomberg Opinion) -- I spent the better part of the last three weeks on the phone with clients of my asset-management firm and friends who wanted a sounding board about markets. That’s not a complaint. For me, one bright spot of this crisis has been a return to indulgently long phone conversations, a throwback to a simpler time before smartphones and social media.
Three questions came up routinely in those conversations, which makes me think they’re on a lot of investors’ minds. My thoughts are certainly not novel. They borrow liberally from investing giants such as Warren Buffett, Jack Bogle, Seth Klarman and others too numerous to name, and financial writers who have covered similar ground over the years and in recent days. But given the opportunity for costly mistakes during market upheavals, it never hurts to revisit some common pitfalls.
The question that came up most is whether investors should sell their stocks now and buy them back later when they decline further. The spread of coronavirus and the resulting economic damage is expected to worsen. As it does, the thinking goes, stocks will continue to decline.
It’s a natural impulse, but it misses a crucial aspect of the way markets work, which is that prices instantly reflect investors’ expectations about the future. That’s probably why, to many investors’ surprise, the U.S. stock market held its ground after dreadful news last Thursday that 3.28 million workers filed for unemployment the previous week, nearly quintupling the previous record. While exact numbers are never known in advance, a surge in initial jobless claims was widely expected well before the Labor Department released its official tally.
More bad news is expected. Goldman Sachs Group Inc. said on Tuesday that it expects the U.S. economy to shrink by an annualized 34% in the second quarter and unemployment to rise to 15% by mid-year before a recovery takes hold in the third quarter. That, too, is reflected in stock prices. The prospect of future declines depends on whether expectations become even more dire. But unless investors can predict if the outlook will darken further, there’s no reason to think they can anticipate the market’s next move.
And that’s only half the battle. Those who manage to get out before another market drop must decide when to get back in, which is never clear. Market turns tend to be sudden. By the time it feels safe, the market is often sharply higher, leaving investors with regret about missing the bottom. Then comes the temptation to wait for the market to revisit its lows, an opportunity that may never come.
I know investors who sold their stocks when Lehman Brothers collapsed in September 2008, months before the market bottomed around the financial crisis. What seemed like a stroke of genius at the time became a harrowing trial. The market unexpectedly turned higher in March 2009 and never looked back. More than a decade later, some of those investors are still waiting for that elusive re-entry despite the likelihood that the market will never revert to that September 2008 level.
There’s plenty of evidence showing that binary market timing, or all-in-all-out moves around markets, is a good way to lose money. I’ve never even seen it work in back tests, which have the formidable advantages of perfect hindsight, zero emotion and no cost. Every time someone tells me binary market timing is possible, I ask for a successful back test, and I have yet to see one.
A second question is whether retirees have time to wait for stocks to recover. If history is any guide, the answer is most likely yes. There have been 10 bear markets in the U.S. since 1948, excluding the current one, as measured by a 20% or greater decline in the S&P 500 Index. The average number of years from peak to recovery — that is, the time it took for the S&P 500 to climb back to its previous high — was 3.9 years, and the median was 2.7 years. On five of those occasions, the market recovered in two years or less. In other words, market downturns tend to feel a lot longer than they are.
The third question cuts entirely in the opposite direction: With markets down and interest rates at historic lows, should investors borrow money to buy stocks? The answer is no. While it’s safe to assume that markets will recover eventually, the path is unknowable. That’s a problem for investors playing with other people’s money. If markets fall further before recovering — a distinct possibility given all the uncertainty, particularly in the U.S., where stocks aren’t cheap — those investors may be forced to sell at even lower prices to meet margin calls. Borrowed money robs investors of time, which is arguably their only edge.
Market downturns tend to provoke extreme reactions, and this one is no different. Yes, savvy investors can pick up some bargains by rebalancing their portfolios or even tilting toward their most beaten-down investments. U.S. investors might also lighten up on home bias, as there are better bargains in overseas stocks. But when markets are roiling, don’t discount the value of doing nothing. I had a seventh-grade shop teacher who used to say, “Sometimes I sit and think, and sometimes I just sit.” For many investors, this is probably a good time to just sit.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Nir Kaissar is a Bloomberg Opinion columnist covering the markets. He is the founder of Unison Advisors, an asset management firm. He has worked as a lawyer at Sullivan & Cromwell and a consultant at Ernst & Young.
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