Patience and Prudence: How to Approach Investment Decisions in Uncertain Times
We live in an unusually uncertain time—one in which the threat presented by a global pandemic changed many aspects of life virtually overnight for most Americans: work, travel, shopping, education and recreation. It would be difficult to overstate the degree to which our society has adapted in recent months.
It’s natural during such times to experience doubt and question how significant changes will affect one’s life more broadly:
- “If we didn’t see that coming, what else is out there that I need to prepare for?”
- “How will this impact my future or my children’s future?”
- “What else do I need to do to be better prepared for what’s next?”
Of course, those doubts can arise related to various aspects of life, but financial considerations are certainly among the leading sources of concern. Is the COVID-19 pandemic a game-changer for investors? How should the current uncertainty affect one’s plans for the future, either in the near-term or in the years to come?
We’ve heard it before: “This time is different.” The fact of the matter is that every time—every crisis, every cycle, every event that alters the status quo—is different. Yet, the way in which market and economic cycles evolve has similarities. So, what should an investor be focused on now as they navigate through the uncertainty?
First, investors would be wise to embrace a degree of humility and not overestimate their ability to try to outsmart the market. Attempting to predict the near-term direction of the markets can be a tempting but dangerous—and potentially very costly—game. Even seasoned professionals within the industry have a terrible track record in doing so.
Second, investors should take inventory of their resources, goals and needs. It’s always important to maintain sufficient cash and other sources of liquidity to meet any potential near-term expenses—especially when uncertainty is heightened. Having an adequate cash reserve should provide the investor with the flexibility to absorb near-term expenses, while allowing them to avoid tapping into long-term portfolio assets at an inopportune time.
Third, it’s reasonable for investors to look for emerging opportunities, but within the context of their existing financial plan. The seeds of opportunity are sewn in the fields of uncertainty. The transition from one market cycle to the next often brings changes in market leadership and investment themes. In the late 1990s for example, technology stocks soared as the “new economy” paradigm was dominant. Of course, the underlying investment thesis was correct; significant changes were coming, but “irrational exuberance” (as described at the time by Federal Reserve Chair Alan Greenspan) drove prices higher than could be justified by fundamentals.
We now know that the bursting of the tech bubble set up a very different environment—one that favored energy, consumer staples and materials over technology and small caps over large caps for several years thereafter. Momentum can persist for some time, but investors shouldn’t bet on today’s top performers being the winners in the coming years as well. There are no “sure things.” Diversification, not concentration, is critical to protecting one’s wealth.
Fourth, investors shouldn’t let the current gloom impair a longer-term optimistic outlook. The challenges we currently face should fade in time, likely either as a result of the development of an effective vaccine or other therapeutic treatments. This is neither the first nor the worst challenge that the world has faced or that investors have had to navigate. The timing may be in question but maintaining a sense of hope and optimism in the future provides a basis for risk-taking and investing in anticipation of brighter days ahead.
Finally, there’s no substitute for patience in investing. At times, it can be very tempting to want to react to the ebb and flow of the news of the day. Investors might be tempted to sell on bad news under the premise of getting back in when conditions appear more favorable. However, markets tend to lead rather than lag the economy; by the time conditions improve and investor confidence has returned, the market has already moved. This year is a perfect example. Investors generally weren’t clamoring to buy equities in late March as the economy was in free-fall, but with hindsight the March low represented a relative buying opportunity. Similarly, investor risk aversion was incredibly high March 2009, arguably the best investment opportunity in several decades. Markets often rebound quickly, and the opportunity cost of holding excessive amounts of cash can be substantial.
Instead, investors would be well served to look through periods of volatility, not losing sight of their true investment time horizon, which isn’t typically measured in months or years, but decades. A well-constructed financial plan and investment portfolio should account for periods of even extreme volatility and provide a roadmap for investing through such periods. Success doesn’t hinge on avoiding market downturns, nor does it depend on picking the right stock at the right time.
For most, the key is having a plan that connects your current situation to your future goals in a way that optimizes the probability of success. For investors, the old proverb is resoundingly true: Patience is a virtue.
The world changes over time, requiring us all to adapt. The sound principles underpinning a well-constructed financial plan designed to protect wealth remain relevant—understanding one’s goals and objectives, maintaining appropriate diversification, being attentive to costs and taxes, and not losing sight of your investment time horizon. These principles proved effective in navigating through multiple wars, prior periods of significant social unrest, recessions, the tech stock bubble of the 1990s, the 9/11 terrorist attacks and the worst global financial crisis since the Great Depression.
This time is different, just as each of those was arguably without precedent at the time. We can see the opportunities that were created with perspective. Patient investors were rewarded for looking through each period and staying invested.
Today’s investors would be wise to do so as well.
Jim Baird is a CPA, CFP®, CIMA®, CIO and partner with Plante Moran Financial Advisors.