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The "Financial Planning Blueprint" Blog

  • Writer's pictureJason Flurry, CFP

Are you dialing the right number?

We have all received a call on our phones only to realize the person on the other end had accidentally dialed the wrong number. Unfortunately, I see a lot of people doing the same thing when it comes to their investments right now. Let me explain.

This year has given us the worst market performance we've seen in almost 15 years. There have been multiple periods where week after week the market averages have consistently gone down with seemingly no end in sight. By all accounts, it feels like we are in a crisis and when you are in a crisis, you call 911.

On the other hand, we know that markets are cyclical, meaning that some years are better than others. We also know that bear markets are reoccurring events and because of that, we have to expect them and the challenges they bring from time to time. Having that perspective changes the bear market experience to one of curiosity instead of crisis. While it does not ease the pain of seeing your balances go down, it does pique our interest toward questions of how long will it last, what is driving the downturns, and how can we best position ourselves financially to recover quickly once things get easier? So, while 911 is the number to call when you're in crisis, 411 is the number to call when you need information.

We live in an environment today where just about anything you want you can get on demand. That conditioning for immediate gratification has shortened our time horizons and increased our expectations for instant results. Unfortunately, financial markets do not operate on that type of basis.

No matter what period of time you look at, you will find that the probabilities of success on the short term are far less than the probabilities of success overtime. For example, over the past century, a person's chances of making money versus losing money in the stock market for a single year is only about 65% positive. If you expand that time horizon to five years, the probability of success goes up to around 90%. Move the finish line out to 10 years, and the probability increases to around 97%. And there has not been a 20 year period of time in the financial markets where anyone who has invested in high quality, well managed companies has lost money, taking the probabilities of success up to 100%.

While there is plenty of evidence to prove that time is an asset for you when it comes to making money on your investments, our emotions override that logic when things are as difficult as they have been lately. That conflict creates indecision and anxiety about what we should be doing right now to try and improve our results. I wrestle with the same thing every day as I'm making financial decisions for our clients. It is so difficult to be right every time because anytime you buy or sell something, there is only a 50% chance that you will get the decision correct. In other words, if we buy something because we think it is going to go up, somebody else is selling it thinking it will go down. Only one of us will be right.

So, now weigh that type of logic against investments in companies like Apple, Microsoft, or Tesla. All three are down significantly this year and there seems to be no end to where they may bottom. If we are looking to sell them on any given day, we have a 50% chance of being right or wrong. If, on the other hand, we look ahead a year and say, “Do we think that the value of these companies will be higher in the future?”, that is an entirely different scenario to consider. At the current levels, it would seem very rational to believe all three of these companies should have a greater than 50% chance of being higher during that time frame. So, if we are playing the probabilities, it would make more sense to hold these companies and let time work to our advantage then it would be to trade them now and speculate.

Most calls to 911 are emotional in nature because there is a true crisis at hand. Calls to 411 are much more rational and logical because they are seeking information that will help solve a problem. If you believe the conditions we are facing right now are temporary, gaining information, putting them in their correct historical context, and thinking through the facts so we can make good decisions regarding the future is the best solution to the problem.

If, on the other hand, you think we will never recover from the scenario we are in now and you are worried about losing all of your money because the financial markets could go to zero, that is a crisis that needs immediate attention. As I've said before, you can only correctly call the end of the world once and history has shown us that financial markets have consistently climbed a wall of worry successfully, only to reach higher levels each time and reward those who persisted through the difficult moments they encountered along the way.

Naturally, my crystal ball does not work any better than anybody else's when it comes to forecasting the future, but my nearly three decades as an advisor has taught me the importance of discipline and patience when it comes to making investment decisions. In a bear market, what seems to be a wrong decision often ends up only being wrong right now. If you continue to hold high quality investments and profitable companies who are leaders in growing industries, time is on your side.

Let me encourage you to focus on your financial game plan and seek more information rather than panic as we wait for this bear market to pass. I would hate for you to one day realize that you had dialed the wrong number at the worst possible time.


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