With all the carnage in the markets of late (the Dow has shed some 5,000 points since February 21, or nearly 18%), is this a good time to pick up some “bargains”? Should you be thinking of this as a stock market sale, with equities on deep discount?
We understand that some of our members may be thinking along those lines right now. As you’ve found your bearings after adjusting to the shock of how far and fast the market has fallen in recent weeks, perhaps you’re hearing Warren Buffett’s words ringing in your ears: “Be fearful when others are greedy and greedy when others are fearful."
As much as this may seem like a good time to do some stock market bargain hunting, we urge caution. Remember, the Bible teaches a slow and steady approach to building wealth.
“Steady plodding brings prosperity; hasty speculation brings poverty” (Proverbs 21:5, TLB).
When the markets fall, all of us would be wise to draw encouragement from Philippians 4:6-7.
“Do not be anxious about anything, but in every situation, by prayer and petition, with thanksgiving, present your requests to God. And the peace of God, which transcends all understanding, will guard your hearts and minds in Christ Jesus.”
And when the markets rise, or when it seems that they might, we would be wise to consider the counsel from Proverbs 28:20.
“A faithful person will be richly blessed, but one eager to get rich will not go unpunished.”
“The plans of the diligent…"
The one group we can confidently encourage to add to their equity positions right now are those whose long-term plan has had them doing so all along via monthly contributions to a workplace retirement plan or IRA. (Read How Dollar-Cost Averaging Uses Bear Markets to Your Advantage.)
For others who are tempted to buy equities right now outside of their long-term plan, I would simply ask, what objective criteria are you using to make your decisions? And I would remind you of a quote attributed to economist John Maynard Keynes: “Markets can stay irrational longer than you can stay solvent.”
Staying sane and solvent
As an investor, I draw comfort and confidence from the mechanical, unbiased, momentum-based rules behind Dynamic Asset Allocation, Fund Upgrading, and Sector Rotation (read Momentum: The Engine That Drives SMI’s Investment Strategies). Because they are trend following strategies, they won’t predict changes in the market’s direction before they begin, but they will eventually get in synch.
During the financial crisis that spanned October of 2007 until March of 2009, a back-tested analysis of Dynamic Asset Allocation (the strategy was introduced in January 2013) shows that it would not have moved out of U.S. stocks until December of 2007. At that point, the market had already suffered through two down months. And it would have waited until February of 2008 before taking its most defensive posture (cash, gold, and bonds). By the same token, while the market’s recovery began in March of 2009, DAA wouldn’t have gone back to stocks until June — and even then, only foreign stocks.
Sure, the strategy would have missed the first couple months of the bear market and the first few months of the ensuing bull market. However, it would have aligned itself with the market soon enough to generate a gain of +1% in 2008 vs. the market’s decline of –37%. When the market finally turned around, DAA would have performed as designed, which is to say it would have participated in some of the gains, notching a nearly +18% gain in 2009 vs. the market’s +28%. (Read What’s Your Benchmark?)
Prone to wander
Even with an objective, rules-based process to guide us, it’s human nature to doubt it from time to time or to get upset when it doesn’t get the timing exactly right. DAA pivoted out of two risky holdings into conservative ones at the beginning of February. That looked like a bad decision for three weeks, but has helped immeasurably since. Even DAA’s move out of U.S. stocks at the beginning of March felt too late, given the Dow’s nearly 3,000 point slide the week before. While no one knows what tomorrow may bring, as I’m writing this the Dow is down nearly 1,500 points from where it opened on March 2nd.
It’s times like these when we have to just keep doing as they do in the military — follow last orders. That won’t always be easy, but it’ll be easier than riding the emotional roller coaster of relief and regret that would come with the territory of trying to figure this out on your own.
What’s a steward to do?
Last week, I had the opportunity to speak at a breakout session during the annual meeting of the Christian Stewardship Network, a group of people who work or volunteer in stewardship ministries at churches throughout the country. The topic was, “What Should We Teach Our Church Members About Investing?” I said that with investing, as with all financial topics, there are biblical principles to be aware of and follow, and then there’s a lot that’s left for us to figure out, hopefully with a heart to do what we sense a steward of God’s resources would do.
Some biblical principles that seem especially relevant right now are those referenced at the beginning of this post: Take a slow and steady approach to building wealth, do not be anxious when the markets fall, and do not be eager to get rich when it seems the markets may rise.
As for the parts of investing that are left for us to figure out, it sure feels like good stewardship to use objective, rules-based strategies with proven long-term track records of delivering the returns we need at a level of volatility we can live with.