Time and time again people claim to be able to time the market. And sure, they may get lucky here and there but most of the time they’ll get it wrong. We can’t control the market but what we can control is our emotions and we can help control our clients’ fear based emotions with the use of behavioral finance.
You Can’t Time the Market & Neither Can Anyone Else
You may have heard this before, but don’t try to time the market. You’ll never get it consistently right and you should be conveying this to your clients. Study after study concludes that investors, consultants, and financial advisors simply can not time the stock market. It’s not that we even randomly get it wrong but most of the time “market timing experts” fail consistently. Some portfolio managers claim to have successfully timed a market crash, or the Federal Reserve raise interest rates but often times if they get it right on the downside, they fail on the upside. Nick Murray said it best, “timing the market is a fool’s game, whereas time in the market is your greatest natural advantage.”
All Unsuccessful Investing is Market-Focused and Performance Driven
And all successful investing is goal-focused and plan driven. When you try to time the market it’s hard to not let your emotions affect you. Even as a financial advisor, it’s hard to avoid natural human biases that affect our decision making and judgment. Instead of trying to answer the questions “what do you think of the market?” “Is this a good time to get in or a good time to get out?” You should be focusing on the accumulation of X dollars in the Y number of years your client has until retirement. That’s why it’s so important to use behavioral finance to refocus your client on their goals. Which brings me to my next point…
Successful long-term investing isn’t primarily a problem of selection and time
But a problem of planning, patience, and discipline. Financial advisors provide more value to their investors when they act consistently on a written plan and have a better than average chance of reaching client goals. Financial advisors who operate their business by reacting to the whims of the market, statistically have a lower chance of success. Our job is to plan because essentially we’re financial planners, not market prognosticators. I concluded long ago that an advisor has to be one or the other. Either we act on a plan or we react to the market.
Still not convinced? This time it’s different? I would challenge you to shift your mindset to “this too shall pass.” Setting goals with your clients is wonderful, and making a plan in support of the goals is wonderful, and building portfolios whose long-term historical returns might bring your clients’ plan to fulfillment is wonderful.
Everything is wonderful.
And then the stock market goes down 30%.
It happens all the time. Well, maybe not ALL the time. But there’ve been fourteen episodes since the end of WWII in which the S&P 500 declined between 19% and 57%; that’s an average of about one every five years, and the average decline has actually been a little over 30%.
They’ve all been long since overcome, of course; indeed, the Index is much higher today than at any time in those fourteen episodes, as is the dividend of the Index.
In point of actual fact, with regard to all the bear markets since 1926, the average time to break even– that is, peak to trough and back to the same peak – is only about 40 months.
That’s a whole lot of wonderful perspective. But it doesn’t seem to count for much when significant price declines hit the equity market, as they always have and presumably always will. That’s because in the words of the great economist and portfolio manager Peter Bernstein,
“Fear has a greater grasp on human action that does the impressive weight of historical evidence.”
You, as a financial planner, shouldn’t be predicting anything. You can’t, and neither can the next guy. Instead, you should be saying to your clients “Throughout history plagued with wars, depressions, market crashes, and every other crisis, THIS TOO SHALL PASS.” This statement has always turned out to be right in the end, while “THIS TIME IT’S DIFFERENT” never has.
We can’t control the market but we can help control our emotions and our clients’ fear based emotions with the use of behavioral finance.
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