Updated: Mar 26, 2020
In his 2007 letter to shareholders, Warren Buffet famously wrote, "You only learn who has been swimming naked when the tide goes out." At the time, he was referring to the housing bubble and ensuing fallout, but the wisdom of his words and the awkward mental picture that accompany them remain. It's easy to take on additional risk when times are good. Still, economies are cyclical, and the tide does eventually go back out. Knowing that, it's easy to assume that we can also be cyclical as investors. Unfortunately, we don't know when the tide will go back out or how far it will go, not to mention when it will come back in. Hindsight is 20-20, and looking back, it's easy to say we should have seen this coming and been able to time it correctly, but, truthfully, we had no way of knowing what the timing or impact would be. We still don't.
When market selloffs occur, I often get questions from acquaintances and family members about the call volume of our office. Their questions typically go something like, "I bet your phones are ringing off the hook right now?" In times of turbulence and panic, that kind of behavior seems warranted, but that's not what happens. I receive very few calls from clients during market selloffs, and it's not because they don't know it's happening or that it's not stressful to see account balances diminish. I don't get a slurry of calls when the tide goes out because my clients and I have planned for moments like this. Instead of kicking off our knickers and jumping in the ocean during the run up, we want to make thoughtful investment decisions driven by our financial goals. Such investing becomes possible when you've taken the time to review your entire financial situation and stress test it to make sure it can weather such a storm as the one currently wracking financial markets.
As we find ourselves in the thick of things, it's tempting to want to do something – sell, buy, get out, get in. But there's a weighty amount of research out there that suggests trying to play the market is not only unproductive but ultimately expensive and, in the long run, detracts from performance. Instead of panicking, might I suggest that you take this time to plan? We don't know what the full impact of current events will be on our economy, the markets, and, ultimately, our portfolios. Instead of trying to predict returns and market movements, we can crunch the numbers for your specific situation and productively tackle the question, "will you be ok?"
At the root of every financial plan, what we're asking is, "Do I have enough?" Sometimes the question is, "Do I have enough to retire?" Sometimes it's "Do I have enough to buy my dream home?" or "pay for my kid's college tuition?" or "go on this dream vacation?" Right now, it's, "Do I have enough to weather this downturn?" And when the answer is "yes" in the context of your specific situation and your goals, two powerful things happen. First, you don't have to hold your breath anymore. You get to exhale and start behaving rationally again. Instead of emotionally moving into and out of the market, you can ride out the tide because you know that your plan was built and tested in anticipation of inevitable market downturns. And secondly, the panic of this moment is put into perspective. I won't deny that COVID-19 and the ongoing crude oil price wars will not affect global output, consumption, and ultimately returns. What I do believe is that this is a short-term economic event, and in the context of a long-term plan and investing time horizon, it is not the end of the world.
In this digital age, information moves fast, and so much of the news cycle is driven by fear because hysteria sells stories. Those same hyped narratives that cause us to run out and buy 100 rolls of toilet paper are the stories that drive us to make unwise decisions with our investments. While we can't prevent or even control uncertainty, we can prepare for it. We can take the time to chart out a financial path for ourselves that is robust enough to handle whatever the financial markets and surrounding sentiment throw at our portfolios. And by doing so, we not only give ourselves a foundation for making rational decisions in times of chaos but we the reap the benefits of spending less time and energy on financial anxiety so that we can spend more time on the things that matter most.