The consensus narrative in the stock market appears to be one of renewed volatility. It is as if market participants have magically discovered the path of future equity market prices with little regard to what may happen if such a consensus is wrong. From a historical standpoint, investors must accept the fact that market movements rarely occur in a way that the masses expect them to. The contrarian viewpoint, or at least accepting a viewpoint that considers numerous possible scenarios, has often yielded a more favorable long-term return environment for investors. For those market participants seeking to understand the current landscape, I urge you to please understand that the narrative of further equity market downside, or further negativity tied to the pandemic, is one that cannot escape you across media channels, family gatherings, or even at the local coffee shop. Such an abundance provides fuel to our emotional bias of anchoring to negative news and further seeking confirmation of such news. Behavioral economics plays a critical role in today’s environment and its implications can spell disaster for most investors not willing to look beyond their emotions. Such issues are often amplified when most investors are working with financial advisors that they themselves mirror their own biases to their clients’ financial plans and investment portfolios. If your personal financial advisor is also your investment manager, beware of the consequences – those two roles are not synonymous. Even worse, many financial advisors may try and use their own fears to further anchor clients’ negative outlooks and persuade them to lock their savings away in an insurance product, or some other form of a perceived “safer asset”. Do not fall victim to such a bias based solely on short-term views. Rather, become a proactive bear market investor and accept the unknown. History is on your side.
If you are an investor with at least a 3-year time horizon, or more, ask yourself this question, “how are my current fears achieving my long-term investment goals?”. It is a very simple reflection that is designed to move us away from short-term thinking and into a longer-term stance. Of course, if you are of the mindset that an economic recovery is never happening and that equity prices are going to zero, then that is certainly an argument to move your investments to cash immediately. Or maybe move your cash under the mattress under such a scenario given that banks are likely to be nonexistent. On the other side of the coin, however, the idea of a recovering economy, alongside equity market prices that more positively reflect upcoming changes, may be something that most investors are overlooking in the short-term. This is occurring partly due to the biases mentioned earlier, but also because of concentrated equity market gains. Diversification this year has been a net detractor to performance rather than a positive to both risk and return. This is not uncommon over shorter time frames, but it is also something that does not historically persist. As we look ahead, the importance of accepting the unknown is a lesson that has historical significance with proven positive long-term results. The reality is that volatility is always around the corner. There is always something to brew negativity, whether that is a geopolitical topic, election related, pandemic focused, or anything else that may sway media headlines. As you navigate the process, the importance of remaining objective in the construction of your investment portfolio, while attempting to avoid your own short-term biases, becomes immensely important. Stick with processes (and firms) that have third-party proven track records alongside cohesive (yet separate) financial planning and investment management divisions. Most critical of all, always question your fears and always voice them. You will likely discover that short-term volatility may likely amplify your long-term success rather than diminish it. Such a mindset shift will not only make you a proactive bear market investor, but it may further boost your long-term success.
Edison Byzyka, CFA – Chief Investment Officer – Credent Wealth Management
Investment advice offered through CX Institutional, a registered investment advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted.