So Much For Once A Week
Consider this a two-for-one. What can I say? Logging twelve-hour days for three weeks straight hasn't left much time for writing. I'll be back on schedule soon.
Things have been going well. Carey and I are rebuilding our processes and our practice, and the rebuild is going better than expected. Odds are you're a client if you're reading this, so thank you for finding us, and thank you for sticking with us.
I have a lot of saved posts that I'll eventually publish. They are, for the most part, pieces about behavioral finance. You know, how everyone seems to have a high tolerance for risk during bull markets, and no tolerance for risk in bear markets. I've been doing this a long time, and that fact still surprises me. Want returns greater than a savings account? You must accept the bad times—and the bad times hurt, but they are worth it.
Like I said, I'll get to publishing those posts sooner than later. This one touches on one emotional bias in particular called loss aversion.
I was asked more than a few times this past week, "Vince, the market just shot up a ton, should we sell and lock in some gains?" Short answer: no, because it's a form of market timing, and market timing isn't something I believe in.
Longer answer: there's a great book called What Works on Wall Street. It was written in 1997 by Jim O'Shaughnessy and is still a good read for anyone interested in financial markets. The book's core messages focus on evidence-based investing and combating loss aversion:
- Evidence-based investing, free from emotional or subjective biases (i.e., how we do things here), is the most appropriate way to invest for most people.
- Loss aversion is an investor's worst enemy.
What's loss aversion? It's an emotional bias that often leads investors to sell winning positions too soon (out of fear of losing gains) and hold onto losing positions too long (in hope of a turnaround). O'Shaughnessy suggests the opposite: ride winners for their full potential and promptly cut underperforming assets to maintain the portfolio's overall strength.
I think I - and most of you - prefer the short answer. But the long answer isn't bad.
Why doesn't market timing work? Because predictions are hard, especially about the future. Want an example? The S&P 500 hit its pandemic low on March 23rd, 2020. Investors who sold missed the market's 70% rebound over the following year. Even brief exits during downturns can mean losing out on major recovery gains.
Stick to being disciplined and having an investment portfolio that works in any market environment given your current financial situation. Reacting is not a plan.
