This morning, Brad and I were discussing the comments made yesterday by Jeff Gundlach (“The Bond King”), specifically as they related to passive investing (we may address this misnomer in a future post). Gundlach said that passive investing has reached “mania status” and will exacerbate problems in the market because it’s hurting behavior. Our clients each have a clear plan of where Brad and I want to go with their account (even if some of them aren’t fully aware). Theoretically, if we stick to these plans, this shouldn’t apply as much to them (the best laid plans…). But certainly for those of you without an anchor you should get one.
This got us thinking a bit more. Shouldn’t the idea of passive investing (indexing), those people in it for the long-term, be much stronger holders of equities than most? Vanguard tells us that their index fund assets account for only 10% of the total global investable market and 5% of trading volume on U.S. exchanges, so it shouldn’t be a issue of indexing becoming too large to sway the natural buying and selling. Perhaps, it’s the fact that sentiment traders and active managers (speculators), since the beginning of the stock market have relied upon people’s fear and greed as contrarian indicators. We’ve heard a lot about the term “capitulation” recently, and you’ll hear it more on the financial news in the coming days and weeks. Capitulation is an emotion we’ve all felt. I like to think of it as the moment where you throw your hands up in the air and say “Enough!”. For investing, this is the moment when you decide you want to deviate from your plan because you become consumed by risk aversion (even though data would point you elsewhere). After all, Warren Buffett is famous for saying “be fearful when others are greedy and be greedy when others are fearful”. Clearly we know what type of environment the current market finds itself in, but we also know, buying the stock market at this level feels a bit like catching a falling knife. Well, I was interested in waiting until the market came down, but now it’s come down so far, so fast…perhaps I should wait a bit longer.
The arbitraging of human emotion will always and forever be our greatest tool against poor investing. Our own fears and greed rely upon irrationality and imperfection to creep into our mind (and not just as it relates to investing). When we take on new clients, generally early in the behavioral education process, some investors feel they should be robotic, attempt to rid themselves of these basic human emotions, but we’re not so sure that’s possible. I wouldn’t consider myself an emotionally volatile person, but the roller coaster of day-to-day market volatility still hits me from time to time. That being said, what can we do to help.
1. Education – Read. If you don’t have time, find a trustworthy financial professional who has enough time to get you up to speed. FInancial education is applicable in every walk of life, and sometimes delegating is an incredible hurdle, one that some people never make it over.
2. Self-Awareness – Feeling those emotions of fear and greed are not only inevitable, but healthy. How you react to them determines everything. Because you have the ability to think about thinking, you can use your emotions to enhance your chances of realizing your investment goals. I’m not talking about outsmarting the market here (unlikely), I’m talking about outsmarting yourself.
3. Long-term Thinking – We have no connection to our future selves, and no comprehension of saving a $1 today to turn it into $10 in 35 years (it’s about a 7% compound growth rate). Sticking to one strategy, being responsible about debt, and saving more than we spend (gasp), are much more important for your overall financial health than the incremental difference between your asset allocation and the optimal flavor of the month.
If you don’t have a plan, get one. If you have a plan and don’t understand it, have your advisor explain it to you. If you have a great plan, go over it again and trust. Times like these are when the rubber meets the road and some of the toughest you’ll face along the journey. It’s time to learn now, so you’ll be prepared. Your future self will thank you.
– Adam