“Ladies and Gentlemen, the Captain has turned on …. ”
Have you been reading the daily headlines—watching markets stall, recover, and dip once again? Turbulence is uncomfortable for everyone. Pilots try to avoid it whenever possible. You, too, might be wondering whether there’s anything you can do to avoid motion sickness.
If you already have a well-structured, globally diversified portfolio tailored to your goals and risk tolerances, a sensible course may be to simply buckle up and stay the course. Remember, our investment advice is aimed at helping you successfully complete your long-term financial journey. As “The Psychology of Money” author Morgan Housel has observed:
“Bubbles do their damage when long-term investors playing one game start taking their cues from those short-term traders playing another.”
The Case of the Missing Bullet Holes
Have you ever heard the story about World War II fighter jets and their “missing” bullet holes? Today’s bumpy market ride seems like a good time to revisit this interesting example of survivorship bias.
The story stems from studies conducted during World War II on how to best fortify U.S. bomber planes against enemy fire. Initially, analysts focused on where the returning bombers’ hulls had sustained the most damage, assuming these were the areas requiring extra protection. Fortunately, before the planes were overhauled accordingly, statistician Abraham Wald improved on the evidence. He suggested, because the meticulously examined planes were the survivors, the extra fortification should be applied where they had fewer, not more bullet holes.
Huh?
Wald explained, the surviving planes’ bullet-free zones were not somehow impervious to attack. Rather, when those zones were getting hit, those planes weren’t making it back at all. Survivorship bias had blinded earlier analysis to the defenses that mattered the most.
Surviving Market Turbulence
You can think about markets in a similar fashion. For example, consider these recent predictions from a well-known market forecaster (emphasis ours):
“Jeremy Grantham, the famed investor who for decades has been calling market bubbles, said the historic collapse in stocks he predicted a year ago is underway, and even intervention by the Federal Reserve can’t prevent an eventual plunge of almost 50%.” — ThinkAdvisor, January 20, 2022
At a glance, that sounds pretty grim. But read that again carefully - he was also predicting the same collapse … a year ago??? Yes, he was:
“Renowned investor Jeremy Grantham, who correctly predicted the Japanese asset price bubble in 1989, the dot-com bubble in 2000, and the housing crisis in 2008, is ‘doubling down’ on his latest market bubble call.” — ThinkAdvisor, January 5, 2021
What if you’d heeded Grantham’s forecasts a year ago, and left the market in January 2021? Time has informed us; you would have missed out on some of the strongest annual returns the U.S. stock market has delivered in some time.
Now What?
If market volatility continues or worsens, fasten your seat belt. You’re going to be bombarded with more of those same predictions. Few will be bold enough to foretell the exact timing, but the implications will be: (1) it’s going to happen soon, and (2) you should try to get out before it’s too late.
Some of these forecasts may even end up being correct. Bear markets happen, so anyone who regularly forecasts their imminent arrival will eventually get it right. Like a stopped clock. Or those continually looping infomercials on how “now” is the best time to load up on silver or gold. (Incidentally, many of these same precious metal purveyors are among those routinely predicting the end is near for efficient markets.)
Bouts of market volatility are like the bullet holes we can see. They’re not pretty or fun. But interim volatility isn’t usually your biggest threat … attempting to avoid it is. The preparations we’ve already made may be less obvious. But they’re there—including tilting a portion of your portfolio into riskier sources of expected return for long-term growth; fortifying these positions with stabilizing fixed income, and shoring up the entire structure with global diversification.
This brings us to the real question: What should you do about today’s news? Unless your personal financial goals have changed, a prudent course may be the one you’re already on. That said, we remain available, as always, to talk through any questions or concerns you may have.
Don’t hesitate to be in touch.
Investing involves risk including loss of principal. No strategy assures success or protects against loss.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.
Bonds are subject to credit, market, and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
The content and opinions in this material are for general information only and not intended to provide specific advice or recommendations for any individual.
All performance referenced is historical and is no guarantee of future results.
All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.