I will be in Austin, TX this week attending a Dimensional Fund Advisors Conference. Speakers include their Co-Chief Investment Officers, Eduardo Repetto and Gerard O-Reilly (both rocket scientists, really!) as well as Portfolio Managers and other brilliant people. While I’m away, I wanted to leave you with some suggested reading in case the return of volatility to the stock market has you frazzled, or you are worrying that we are about to enter a bear market. On the other hand, if you are remaining calm in light of the market’s performance these past few weeks, this post has some useful reminders about wise investing…
This is shaping up to be as bad as the 5% January correction that nobody remembers anymore.
— Morgan Housel (@TMFHousel) October 10, 2014
- Now may be a good time to re-read our “Evidence-Based Investment Insights” Series, especially “Ignoring the Siren Song of Daily Market Pricing.” (SageBroadview Blog)
- More good refreshers for when the markets get volatile are “Considering Market Corrections” and “As Close to a Market Prediction as We’ll Ever Make.” (SageBroadview Blog)
- “Once you realize how normal and inevitable market volatility is, you might think of it differently when it comes. It might look less risky, and more like the cost of admission to achieving the market’s long-term returns. Here are a few things to keep in mind when thinking about how to react to the market’s next inevitable correction.” (WSJ)
- Ben Carlson is someone who I read daily. His articles are filled with wisdom and common sense.
“Because of the increased volatility, people are going to be coming out of the woodwork this week to offer their opinions and solutions in hopes of calling the next move correctly… Consider the sources…(A Wealth of Common Sense)
“Intelligent investors understand that it’s foolish to base a process exclusively on their ability to predict the future with any certainty…Even if you know exactly what’s going to happen with the economy or geopolitical events, the markets aren’t conditional. There’s no if X happens, then Y must follow…The challenge for investors is that you have to position your portfolio to take advantage of the future even though it’s impossible to predict. …In many ways, investing is really about forecasting your future emotions, not predicting where interest rates or the stock market will go. You then structure your portfolio accordingly. This is why asset allocation is so important. If you know you can’t handle extreme volatility, you should own fewer stocks in your portfolio. It’s why defining your time horizon and risk profile for any investment decision matters so much.” (A Wealth of Common Sense)
- “Stop logging into your retirement accounts.” (The Certifiable Planner)
- “Crashes happen. That’s a risk we take when investing. Let’s face it, most of us are better off not following the daily stock market news. Tuning out is one way to leave your investments alone.” But how would we react to news delivered in a different light? Here is a Template For the Next Market Crash (Novel Investor)
- A good reminder from Warren Buffett’s Berkshire Hathaway Inc. 1997 Chairman’s Letter
How We Think About Market Fluctuations
A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.
But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.
So smile when you read a headline that says “Investors lose as market falls.” Edit it in your mind to “Disinvestors lose as market falls — but investors gain.” Though writers often forget this truism, there is a buyer for every seller and what hurts one necessarily helps the other. (As they say in golf matches: “Every putt makes someone happy.”)
- A hilarious but painfully true guide – What to Do During a Market Correction (The Reformed Broker/Alex Tarheni)
Sage Serendipity: As a perpetual student myself, I found this to be a fascinating article for learners of all ages: “Better Ways to Learn”