Sure bet on the markets? There’s no such thing
Average investor should do... nothing
AALL THROUGH THE MARKETS’ RAPID RISE, THE TONE OF MOST OF THE COVERAGE WAS: THIS IS UNSUSTAINABLE. STOCKS ARE WAY OVERPRICED. SO FINALLY STOCKS BEGIN TO RETURN TO MORE NORMAL VALUATIONS AND WHAT IS THE REACTION? OH, THE HUMANITY. — ANDREW COYNE
tl a sta splash of reality. For months — for two years, really — it looked like stocks could only go up. The Dow Jones Industrial Average advanced at what seemed like a torrid 13.4- per- cent pace in 2016, only to climb another 25 per cent in 2017. In just the first four weeks of this year, it added another 7.7 per cent.
Then came the last two weeks, and the markets’ return to, if not Earth, then at least the outer stratosphere. Before Friday’s rebound, the Dow had fallen more than 10 per cent from its Jan. 26 peak. This was significant, journalistically, in two ways: 1) because 10 is a round number, and 2) be- cause somebody somewhere decreed that any decline in stock prices of more than 10 per cent counts as a “correction.” And you know what that means. It means it’s a decline of more than 10 per cent.
Why is this happening? The short answer is: nobody knows — least of all the people who write about stocks for a living. Stock market analysis is notorious sketchy ( my favourite explanation is “selling pressure,” as if buyers had to be browbeaten into taking the shares), when it is not bizarrely anthropomorphic (“markets are tired”).
As always, the rule is: All Economic News Is Bad. First formulated by the American j ournalist Gregg Easterbrook, it is an infallible guide to economic and market reporting. All through the markets’ rapid rise, the tone of most of the coverage was: this is unsustainable. Stocks are way overpriced. So finally stocks begin to return to more normal valuations and what is the reaction? Oh, the humanity.
The Complainer in Chief, Donald Trump, was heard to complain the other day that the debacle seemed to have been set off by what would strike many as good economic news: last Friday’s U. S. employment report, showing hourly earnings up 2.9 per cent in January over the previous year.
That the U. S. is close to full employment has been clear for some time, but it had not previously seemed to translate into the rising wages one would ordinarily expect to see in tight labour markets — one of many seeming anomalies in a post- financial crisis economy into which central banks have poured trillions of dollars with little apparent effect.
The suggestion that some of the old rules might be reasserting themselves may well have caused traders to consider whether others might soon do the same: such as the rule that after wage increases follow price increases, and higher interest rates after them. Or it may have merely caused some traders to think that others would think this. We don’t really know. Movements in market sentiment, like other forms of public opinion, are essentially unknowable, as deep and mysterious as the oceans.
Higher interest rates are obviously bad news — why, the only thing worse is low interest rates. I don’t mean this in the Easterbrookian sense (“how are seniors supposed to live on these yields”). But a world of one- or two- per- cent i nterest rates, such as we have been living in for the past decade, is not normal; when rates are that low, and are expected to remain that low, it causes people to do strange and reckless things. The return of a world in which rates can sometimes rise, just as stock markets can sometimes fall — a world of risk, that is — is to be welcomed.
What should you, t he average investor, be doing at times like these? This I do know: nothing. But then, nothing is what you should be doing at most times. You should buy stocks i f you have the money, but most of all if you have the time: that is, if you are relatively young and will not be needing the money for many years. If you are old enough to worry about your stocks, you are too old to own them.
And having bought them, leave them alone. Don’t sell when markets are falling, and don’t buy when they are rising — but don’t do the reverse, either. “Buy the dips” i s no better advice than “the trend is your friend,” because a) you’ve no idea whether today’s stomachchurning drop is the prelude to a juicy rebound or a still worse drop to come, but mostly because b) it doesn’t matter.
Have a look at the stock charts. That 10- per- cent drop looks pretty bad compared to what stocks have done over the last six months or a year. On even a five-year chart it’s a blip.
Decades of observation teaches that stocks, whatever their short- term ups and downs, tend to rise over the long run, and pay higher returns than safer assets like bonds. Theory tells us why: the riskier an asset, the more it must pay to persuade investors to hold it.
But that’s about all we know. In particular, no one really knows how to “beat the market” — to pick investments, within an asset class, that will pay better- thanaverage returns — though many claim to.
So don’t try to pick stocks, and don’t pay fund managers to try: buy the index. ( You want higher returns? You pay for them in risk, that is by investing in riskier types of assets.) And stay fully invested: since stocks are more likely to rise than fall on any given day, any day you are in cash is more than likely a day you are missing out on a rally.
Not only does no one know how to beat the market: no one knows how to time the market either. The people who sell at times like these do so either because they need the money in the short run — in which case they shouldn’t be in stocks — or because they think they know where the market is going. But they don’t, and neither do you.