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  3. What's Past is Prologue

What's Past is Prologue

Submitted by WWA Planning & Investments on January 15th, 2014

I’m turning to the Bard for the title of 2014’s first message because there are articles everywhere right now offering forecasts for the upcoming year. I never try that myself because I know I can’t predict the future. Instead, I thought I’d reflect a bit on the past to see what lessons we might learn.

Of course, 2013 was a great year for stocks. Those who invested during (or remained invested through) the 2008 correction did very well. Those who stayed out of the market were left behind once again. This pattern has been repeated over and over and has more to do with people’s anxieties than with any specific investment strategy. Here’s a simple illustration of what I’m talking about.

 

                                             

Whether you apply this graph to the tech stock bubble of the late 90’s and the 2000 correction or the housing-fueled bubble of the mid 2000’s and the 2008 correction, the pattern should seem familiar. Investors who tire of absorbing “paper losses” as the market falls often sell at just the wrong time. Having already sold low, they wait until “things begin to look better” before investing again. Especially if they’ve previously been burned by the markets, they tend to remain on the sidelines too long. Of course, the longer they wait, the higher they will eventually buy back in, compounding their error and keeping them out of the rising market. Commonly, these investors return when the market is near the peak of its upswing because it’s “popularly agreed” that the market will continue to go up forever. In doing so, they miscalculate both risk and profit potential and are almost certainly buying high.

Since I’ve already admitted that I can’t predict the future, you might wonder what value I bring to the investing process. First, even though I’m as human as the next person and just as likely to experience the emotions described in the graph, it is my professional duty to draw back and give advice from outside those emotions.

Second, I’ve worked in the world of investments long enough to have experienced and survived more than one of these cycles so have at least a hint about what to expect. Third, simply having someone to talk to has a way of helping calm people’s fears. That’s a role we fill almost every day for at least one of our clients, expanding to include almost all of our clients during periods of market correction.

Finally, since we only assume asset management responsibilities after putting a financial plan in place, I can often help by suggesting that a client focus more on the progress of their plan than the value of their investment at any given time. This helps bring some peace of mind during these excruciating corrections.

As investment advisors, we are not immune from feelings of fear and optimism. However, we employ a very disciplined strategy in order to insulate decisions from feelings and, so far, seem to have been reasonably successful in doing so.

Ours is not necessarily a unique approach. Having begun this article with a comment from Stratford on Avon’s Bard, let me close with one from Omaha’s Oracle. Warren Buffett once said: “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

 

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