As I glanced at the market news today, what came immediately to mind was the old Van Morrison song, “Days Like This.” It should be an anthem for all investors. The gentle instrumentals and soothing lyrics feel like something of a tonic for the soul during troubled times.
And so do the words we’ve written many times in the past on days like this — words I need to hear again and again, and perhaps you do, too.
There will, indeed, be days like this
It doesn’t take all that much knowledge of market history to understand that the market’s long upward march has been marked by plenty of down days along the way. On any given day, the possibility of gains is just as strong as the possibility of losses. Nor does it take much knowledge of the past to realize that there will be market corrections and bear markets. It simply comes with the territory of being an investor. All investors should live with the expectation of market pull-backs.
Down days don’t ever feel good
Still, no investor enjoys strong down days in the market. It’s a well-documented fact that most of us feel the pain of loss on a much higher magnitude than the pleasure of a comparable gain.
This, too, we can expect. And expecting to feel bad when the market falls can actually take a little bit of the edge off those bad feelings.
It’s always something
In the heat of the moment, current circumstances can seem troublingly unique. And let’s face it, few of us have experienced a global pandemic. Layer on top of that inflation worries, questions about whether the Federal Reserve is making the right moves, and new COVID flare-ups, and it can feel like there’s no map that can guide us. While I don’t mean to diminish the challenges we face, an important lesson from history is that every era has brought what felt at the time like uniquely insurmountable difficulties. (Read The Enduring Optimism of an Investor.)
Just as loss aversion seems to be hard-wired into us human beings, so, too, is an action orientation. On days like this, it’s natural to feel like Neo as he tried to find his way through the Matrix: “I just wish… I wish I knew what I’m supposed to do. That’s all. I just wish I knew.”
In many ways, the instinct to act serves us well. Noticing a car barreling toward us should prompt us to take action. But investing is different. There’s a phrase in the investment community you’ve probably heard: “Don’t try to catch a falling knife.” In other words, taking action when the market tumbles usually ends up doing more harm than good.
I like a good heroic story as much as the next person. I’m drawn to tales of people overcoming great odds through incredible hard work and perseverance. And yet, the longer I’ve been an investor, the more I’ve come to realize that many times the heroic work of an investor is resisting the temptation to act and instead doing nothing at all.
Our emotions may scream, “Don’t just stand there. Do something!” However, as incredibly difficult as it can be, we would be better served by doing nothing.
No one can predict the movements of the markets because no one can predict the events that move markets or the ways that investors may respond to such events.
That isn’t to say there’s nothing for us to do on days like this. Here are three suggestions.
1. Know the math. Point losses, as dramatic as they may seem, need to be viewed within the context of percentage losses. Seeing a headline that announces an 800-point loss sounds ominous. And while it’s certainly not great, it’s also not catastrophic. It’s a less than two and a half percentage point decline for the Dow.
2. Know the plan. Long-time SMI subscribers know what I’m about to write here, but I’ll write it nonetheless. The importance of following a strategy you can stay with through thick and thin, and then actually staying with it, can’t be overstated. Days like this are a reminder that such a strategy should be marked by:
- Objectivity. You don’t want someone’s best guesses guiding your portfolio. You want an objective, mechanical, rules-based system that takes the decision-making off your shoulders and has a long track record of delivering the returns you need to meet your objectives.
- Suitability. You want the peace of mind of knowing your strategy has been tailored to your unique time frame and temperament.
- Clarity. You want the confidence of being able to explain to anyone who asks how the strategy you’re following works and why it’s well-suited to you. The acid test is whether you could explain it to a 12-year-old.
3. Know the Truth. Early last year, as the market grappled with the early days of the pandemic, was an especially challenging time to be an investor. As you may recall, the market fell a breathtaking 34% in just 16 trading days. It was a scary time, and then things got downright strange. Contrary to what I expected, millions of people flocked to the markets. All sorts of craziness made headlines, from people with big social media followings live-streaming their day-trading to members of a Reddit forum banding together to run up the prices of battered down stocks.
In the midst of all that, we asked you, our members, what got you through such a calamitous time. Your faith shone like a wonderful, bright beacon. So many of you talked about your trust in God's provision and cited specific verses of Scripture that ministered to you. (Read The Marks of a Christian Investor.)
Give thanks for the good days
The interesting thing about Van Morrison’s song, “Days Like This,” is that it’s not about shrugging your shoulders and getting through the tough days. It’s about good days — “When it’s not always raining…”, “When no one’s complaining…”
And within that optimism may be the most important reminder of all. When times are good, let’s not be so quick to take them for granted. Let’s drink them in with deep gratitude. And then, on days like this, let’s remember that there are better days ahead.
“For our light and momentary troubles are achieving for us an eternal glory that far outweighs them all. So we fix our eyes not on what is seen, but on what is unseen, since what is seen is temporary, but what is unseen is eternal” (2 Corinthians 4:17-18).