Scalper1 News
Sometimes we’re late to interesting polls, but hey, they’re still interesting. Back in November, Gallup and Wells Fargo polled people to ask them how well they could stomach a “significant” market downturn, publishing the results on January 22nd . Or note, they defined significant as 5-10%. The results were quite confident: Gallup/Wells Fargo Downturn Poll Some wacky lines there – 87% of stockholders were at least moderately confident in their portfolios, and 82% of investors overall. People in a better position to actually handle downturns with smaller returns – those who don’t hold stocks – were only 61% moderately or better confident. Should We Trust Our Peers at their Word? In a word, no. These are interesting results, for sure, but I see lots of problems here – not just the fact that a significant downturn is defined as only 5-10%. The most recent recession saw drops an order of magnitude larger – in percentage terms (!) – of over 50% in major indices. We lost major financial institutions over a hundred years old, investors panicked, and maybe 10% of people (that’s a stretch) were confidently buying at any opportune time, let alone not panic-selling everything they owned. (We played around with what a “significant” drop might actually be in the past, but found you can be more than a few years early with your calls in some circumstances and still weather a downturn.) So let’s concentrate on our peers’ answers themselves. Do you really think this poll accurately reflects how people would react in a downturn? No, neither do I. You’ve got something of a Lake Wobegon effect going on here – you know, the “fictional” town where everyone was above average. In reality, stock markets have a tendency to over-correct – markets historically oscillate somewhere between ridiculously overpriced and a bargain (of course, identifying those periods is, perhaps, impossibly hard except in retrospect). That’s because previously confident people are selling into a downturn – “locking in losses” – and buying only when the stock market has come back “buying the highs!”. In fact, identifying actual investor results backs up those statements to a degree you’d almost think impossible. Dalbar releases studies on actual investor performance in the markets versus price (or dividend reinvested price) returns, and the results are crazily disconnected: through November 2015, in the order of earning 5.5% on S&P 500 funds in the last 20 years, versus stated returns around 9.85% . (We have a calculator so you can see dividend reinvested returns for the S&P 500 and the Dow Jones Industrial Average). Okay Smart Guy, What Then? For the average investor – and, Wobegon aside, we’re all probably closer to average than we tell ourselves – the best move is to set it and forget it. Consistently, when we do have market downturns, it turns out that many investors have actually overestimated their intestinal fortitude. For a typical person, the best move is to set your portfolio during market doldrums , with a mind to setting in up in such a way that you won’t mind too much if there is a massive move to either the upside or downside. As for re-balancing, it’s best if you go in with a plan, and openly rebalance at a standard time – and, if you can, avoid doing it that often. Believing in your portfolio is one thing, but investing during mania or a crash is no formula for a successful long-time plan. So, make the case. Would you be prepared for a significant downturn without selling most of your portfolio? Why, or why not? Scalper1 News
Scalper1 News