During my career as a financial planner, I have come across some smart quotes that illustrate key messages that particularly resonate in times of financial stress. When stock markets are volatile, we need the basics more than ever to stay on the path to financial independence. The following quotes rank among my favorites.
âIn bear markets, stocks return to their rightful ownersâ is attributed to JP Morgan, perhaps the most prominent banker of the late 19th and early 20th centuries. What did he mean by that? It is a common curse of individual investors (and undoubtedly many professionals) that the motivation is strongest to sell stocks after a severe market decline. The flip side is the euphoria many get when stocks hit new highs, encouraging us to invest more.
Morgan was describing the process that occurs when the stock market suffers from a bear market. Individual investors may be encouraged to sell their positions in equities. Since someone is always on the other side of any transaction, these stocks can end up in the hands of institutions and other patient investors. Various studies have documented how the behavior of individual investors can often run counter to their own interests.
The American Association of Individual Investors tracks investor sentiment over time. Pessimism peaked in early March 2009, with over 70 percent of survey respondents indicating they were bearish, meaning they expected stocks to continue falling. In January 2000, 75 percent of respondents said they had a bearish outlook. Long-time investors know that these two periods in retrospect have been fantastic buying opportunities. Still, at least to an extent, investors were at their darkest.
âThe stock market can stay irrational longer than you can stay solvent,â is attributed to British economist John Maynard Keynes. This quote is about betting that the stock market is going to go down, whether an investor is buying stocks for cash or selling stocks short. Most investors don’t bet that the stock market is going to crash and risk more than their initial investment. But this quote can apply to those who are waiting for the right time to enter the market. It also works for those who are considering selling stocks when a bull market seems a bit long in the tooth.
If you think back to 1996, when former Federal Reserve Chairman Alan Greenspan reflected on “irrational exuberance” pushing the stock markets to a sparkling high. He might have been right, but the bull market continued for another three years. Investors selling stocks during his speech reportedly missed out on sizable gains in the stock markets.
âDon’t just do something, stay there,â said the father of modern stock indexing, John Bogle. His point was that in times of market crisis sometimes the best strategy is to take a breath, count your blessings, and hold onto your stocks. Avoid the curse of the common investor. Over the past 20 years, we have been through two severe bear markets as well as one particularly marked last year. After each, the larger indices more than recouped their losses and hit new highs. If you feel the urge to ‘do something’, consider rebalancing – buying on the stock market when apparently everyone wants out.
“You only find out who swims naked when the tide goes down,” famed value investor and billionaire Warren Buffett wrote in a 2001 letter to investors during a severe bear market. His argument was that when markets take a prolonged decline, you can see which investors are taking more risk in their portfolios than they should. They may be forced to sell in a bear market, potentially putting their financial independence at risk. Perhaps the worst investment strategy is one that becomes more conservative after the stock market falls. I advise you to check your swimsuit while the stock
market is close to its all-time highs.
David Gardner is a Certified Professional Financial Planner with Mercer Advisors and practices in Boulder County. The opinions expressed by the author are his own and are not intended to serve as specific financial, accounting or tax advice. They reflect the judgment of the author on the date of publication and are subject to change.