too fast for love
- 13 Dicembre 2021
Market declines are a necessary evil and the very reason the stock market has provided the large risk premium and the high returns investors can earn. But there is another important point investors need to understand about market declines. Investors in the accumulation phase of their careers should view such periods not just as a necessary evil but also as a good thing. The reason is that large declines provide those investors (at least those who have the discipline to adhere to their plan) with the opportunity to buy stocks at lower prices, increasing expected returns. It is only those in the withdrawal phase (such as retirees) who should fear sharp declines because withdrawals make it more difficult to maintain the portfolio’s value over the long term. Thus, those investors have less ability to take risk, which should be built into their plan.
Smart investors know that while they can’t control markets, they can follow Warren Buffett’s sage advice to avoid timing the market, and the key to being able to do so is to control one’s temperament: “The most important quality for an investor is temperament, not intellect.” If you don’t have a plan, immediately develop one. Make sure it anticipates sharp declines and outlines what actions you will take when they occur (doing so when you are not under the stress that such periods create). Put the plan in writing in the form of an investment policy statement and an asset allocation table and sign it. That will increase the odds of adhering to it when you are tested by the emotions caused by both bull and bear markets. And then stay the course, altering your plan only if your assumptions about your ability, willingness or need to take risk have changed.