The Itch for Action

We’ve certainly endured a wild ride in stocks over the last month or so – enough to make even the most steadfast investors queasy. If the market hasn’t made you nervous yet this year, you either live under a rock or are lying.

During dramatic sell-offs, like what we’ve experienced so far in 2020, the temptation to rip up otherwise sound investment plans grows greater by the day. In fact, doing nothing feels downright irresponsible. But, assuming you had a coherent plan beforehand, impromptu portfolio changes during periods of unrest are far riskier than sticking to the script – even though it doesn’t feel that way.

Scratching the itch for action will seem conscientious in the moment, but making a big investment decision (buy or sell) while we’re in the midst of extreme volatility is pure speculation – AKA as risky as it gets. This sort of speculation can have dramatic and lasting ripple effects on financial well being. As Mark Twain once said, “There are two times in a man’s life when he should not speculate: when he can’t afford it, and when he can”.

The greatest trick the devil ever pulled was convincing investors they need to do something right now.

It’s truly cruel that when the market gets crazy, doing nothing feels like part of the problem, while reacting speculatively feels responsible. This is precisely backwards, and is why investing can be so hard. The predicament is only exacerbated by our proclivity towards the binary. We want all the relief of action, not just some of it. And so we think: in or out, up or down, stop or go. But investors who think in these terms are playing the wrong game. It doesn’t have to be this way.

One of my favorite ways to think about investing comes from the great Howard Marks:

“Is football a good metaphor for your view of investing? Well, I’ll tell you, it isn’t for mine. In investing there’s no one there to blow the whistle; you rarely know when to switch from offense to defense; and there aren’t any time-outs during which to do it.

No, I think investing is more like the “football” that’s played outside the United States – soccer. In soccer, the same eleven players are on the field for essentially the whole game. There isn’t an offensive squad and a defensive squad. The same people have to play both ways…have to be able to deal with all the eventualities.”

A sensible investment plan is not predicated upon the ability to speculatively jump into or out of markets – nobody can reliably do that. We never know what the next crisis-du-jour will be, or precisely when it will occur, but sound investment plans assume that they’ll transpire nonetheless. They position accordingly for the inevitable arrival and departure of volatility, and acknowledge that its timing will only seem obvious in hindsight. We have to be able to deal with all the eventualities.

Short of a crystal ball to help us nail market tops and bottoms, the best we can do is field a team that speaks to our goals in all market environments. Mass substitutions during periods of market volatility might feel good, but they’re rarely wise in hindsight.