In an article for ETF.com, BAM Alliance director of research Larry Swedroe argues that there are no assurances as to when it’s safe to invest in the stock market.
“For many investors today,” he writes, “the market looks too dangerous. So, they don’t want to buy, or they decide to sell.” The problem with that approach, he describes (using the metaphor of a life guard flag at the beach) is that “there is never a green flag that will let you know that it’s safe to invest.”
Panicked selling is usually a bad idea, Swedroe contends, adding that over the last 78 years, the S&P 500 fell more than 15% in a month only twice (in October of 1987 and October of 2008).
Swedroe lists “5 Lessons to Be Learned:”
- Without bear markets there would be no risk and therefore no equity risk premium. “As investors,” writes Swedroe, “we would not like that.” He suggests that investors “write down your reasoning in an investment policy statement (IPS) tied to your specific goals. That way, when emotions grow strong and threaten to overrule reason, reason can prevail.”
- Don’t be easily swayed, he warns: “Your investment strategy should be based on evidence, data and logic. You should not be swayed to change your strategy unless you are convinced the underlying assumptions on which your strategy was based have changed.”
- “There are always things to worry about,” Swedroe writes, which is why “during bull markets stocks are said to climb a wall of worry.” Therefore, he adds, although investors may have concerns about high share valuations, the yield curve and the threat of trade war, these risks “are already incorporated into prices.”
- “Don’t make the mistake of confusing strategy with outcome,” Swedroe warns. In investing, he says, it’s extremely difficult to predict results. “Thus,” he writes, “a strategy should be judged in terms of its quality and prudence before—not after—its outcome is known.”
- “I’ve always believed, “says Swedroe,”that the greatest anomaly in finance is that, while investors idolize Warren Buffett, they not only fail to follow his advice, but often do exactly the opposite of what he recommends.”
“The bottom line,” Swedroe concludes, “is that the evidence demonstrates a strategy of buy, hold, and rebalance is the most likely way to achieve your goals.” It’s critical, he adds, to take a long view, adding that the “key to having patience is to be sure you have not taken more risk than you have the ability or willingness to assume.”