We all know that market timing doesn’t work. It is a fool’s errand to sell it all, hoping to buy it back lower. But the temptation to do so is heady when the market is in decline. When the near future looks scary, it’s easy to think that perhaps selling now and buying back later is a good idea this time. Fear encourages self-justifying arguments for bad decisions by wrapping them in something else.

I am starting to hear a theme repeat itself over and over again. It goes something like this: “Hey Gil, I’m not so sure that I should be taking these kinds of risks at my age.” Hmm. This risk disparity seemingly only becomes apparent after a 20% decline in the market. Six months ago, before this decline started, you were still the same age you are today; you just weren’t thinking about it when the market was making new highs. This is market timing cloaked as an age-adjusted risk level to justify it as a good decision when we know better. The underpinning is the same, emotional distress seeking relief. 

Emotional distress is easy to understand in these types of markets. We should expect that this market situation will not repair itself quickly. The market snapped back quickly from Covid because the disturbance seemed to have a limited time window. Unfortunately, rising interest rates tend to move a whole lot slower through the system, and the recovery from the trauma of rising interest rates could last quite some time. This will give people more years to age and then self-justify why they should be investing in something else. Of course, this decision is made more complicated by the fact that the alternatives are actually much more appealing at this time. A year ago, short-term interest rates were under half of a percent. Today they pay eight times that. So there will be some incentives to buy safer vehicles. As those people come out of the stock market for relief, it will create negative price pressure. But that doesn’t mean the markets will crash; it just means that it is highly likely to take its sweet time normalizing itself and probably won’t come roaring back anytime soon.   

It’s also worth noting that these types of wrecking ball markets are quite healthy for long-term investors. When the money seems easy to make, it encourages new participants to throw their money into the pile. This apparent ease is why we saw such strong action in speculative meme stocks and bitcoin over the past few years. That has ended in disaster for most playing that game. Investors were encouraged to pursue these very aggressive activities because the getting seemed so good. Long-term investors who stay put tend to accrue very good returns because as those temporary visitors enter and exit the marketplace, they tend to leave money behind that will be picked up by the rest of us. If the money were easy all the time, the market would be packed with participants, values would cease, and returns would get pinched in perpetuity. It’s the raised eyebrows and grimacing faces that make the market work for the rest of us.

The moral of the story is to manage your liquidity and stay put.

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