Insanity?
It’s been said that the definition of insanity is doing the same thing over and over again and expecting different results. Staying invested in down markets like the one we’re currently experiencing can certainly feel like that at times. In fact, there’s perhaps no stronger investment inclination then to pull money out of the market when a loss is experienced. While this is a natural “protective” instinct, the short video below demonstrates, how this can actually be less protective than simply leaving money invested.
As counterintuitive as it feels, targeting the best market days or trying to avoid the worst does little to protect invested assets. Why? Market timers need to guess correctly twice: when to pull money out of the market, and when to reinvest it. Mistiming either the peak of a bull market or bottom of a bear market (or both) by just a few days can drastically impact overall performance.
Time in the market is more important than timing the market.
History supports remaining invested through the good times and the bad. Staying invested and focused on the long term helps ensure that you’re positioned to best capture what the market has to offer. Said differently, time in the market is more effective than timing the market.
Passive (Strategic) Investing
This investing philosophy is often termed “passive,” but it is far from a do-nothing approach. Think of it as more strategic. It starts with an appropriate risk allocation between equity and fixed income investments – based on personal risk tolerances and time horizons for using the assets.
Further diversification spreads portfolio investments across domestic and global regions, business sectors and company sizes. Effective diversification reduces investment risk without sacrificing returns.
A number of tools, such as rebalancing, tax loss harvesting and converting depreciated assets, are especially effective during down markets and serve to systematically enhance investment returns. The practical use of these tools is outlined more fully in a previous blog here.
Principled investors do the same thing over and over again because they expect the same results.
Revisiting our initial definition of insanity shows that a strategic investing philosophy stands in stark contrast to what, at times, seems like market insanity. By staying invested through market ups and downs, principled investors do the same thing over and over again because they expect the same results in the form of historical returns. In this way, a principled investing plan helps maintain sanity and rewards investors even in times of market turbulence.
If you have any concerns or questions about your investments or are interested in knowing more about how we are working to protect clients’ assets, please don’t hesitate to reach out.
