When stocks tumble, be greedy when others are fearful

There is one thing more contagious and dangerous than COVID-19; that is fear.

Not only does fear and anxiety weaken our immune system (we physically become more susceptible to illness), it also wreaks havoc on our decision making. We all want to make thoughtful and deliberate decisions, but when we allow fear in, it takes over and may influence us to make decisions that feel right at the moment, but end up being detrimental over time.

Understanding the mind can help us maintain proper perspective, which is essential to good decision making. Whenever uncertainty abounds, such as the present, the brain seeks to find some semblance of control — even if it is just an illusion of control. And it wants to do something. The irrational hoarding of toilet paper and other staples is evidence that the brain is doing something to feel a sense of control.

This same desire for control can lead investors to want to make changes to their portfolio that is not in line with their plan. We need to acknowledge there are things we can’t control and things we can. Right now your greatest control is in the investment decisions you make, or choose not to make.

The best way to combat fear is with facts and truth. That can help you have a better perspective on things and encourage wise decisions. Here are a few facts:

The market will remain volatile and may go down more.

The economy will likely fall into a recession.

COVID-19 may get worse before it gets better.

Many of our daily activities will be suspended/altered.

This may last longer than we are expecting/hoping.

Now that you have the facts, do you really need to turn into the news to tell you this stuff over and over? This is a good time to practice “strategic ignorance.” Not all information is beneficial.

Perhaps the greatest question you can ask yourself right now is: Will this matter in five years?

In five years (and probably sooner), we should have a vaccine and the economy should have recovered. Do you want to look back and see yourself selling great companies at low prices just because of the uncertainty and fear today? Or do we want to learn from 2008/2009 financial crisis and seek opportunity to profit from others’ panic? COVID-19 may not matter in five years, but the decisions you make this year will absolutely matter.

Stay calm. Stock market volatility is perfectly normal. Between 1980 and 2019, the S&P 500 experienced an average intra-year drop of 13.8% (peak-to-trough), yet had a positive return in 30 of 40 calendar years.

Stay in. According to Lord Abbett, $10,000 invested in the S&P 500 on January 1, 1999 would have grown to $86,280 by December 31, 2019. However, ”An investor who exited the market and subsequently missed just 10 of the best-performing days in those past 20 years would have lost out on more than half of the gains (growing instead to only $43,059)” Further, “Given the difficulty of market-timing (six of the 10 best days occurred within two weeks of the 10 worst days), a far better course would have been to stay in, with the knowledge that volatility is normal and that missed upside can dramatically cut into long-term returns.”

Stay the course. For long-term investors, time is on your side. Historically, the longer you stay in the market, the greater the probability for a positive outcome. According to Crandall Pierce, for rolling periods between 1950 and 2019, one-year returns for the S&P 500 were positive 79% of the time (range of -43.3% to 61.2%), five-year returns were positive 92% of the time (-6.6% to 29.6%) and 10-year returns were positive 97% of the time (-3.4% to 19.5%).

We’ve been through many significant market declines over our firm’s 45 years. While COVID-19 is new, surprises and economic shocks are not new to us. No matter the cause of the shock, our response is always the same — we seek opportunity in others’ fear. I have no idea where stocks will be in 6-12 months and neither does anyone else. However, I am very confident five years from now they will be higher.

As Warren Buffett said, “Be fearful when others are greedy and greedy when others are fearful.”

Many thanks to Jay Moreland of The Behavioral Finance Network for giving me permission to share his thoughts. Past performance is no guarantee of future results.

Mickey Kim is the chief operating officer and chief compliance officer for Columbus-based investment adviser Kirr Marbach & Co. Kim also writes for the Indianapolis Business Journal. He can be reached at 812-376-9444 or [email protected]. Send comments to [email protected].