How To Invest Well In Turbulent Times

Posted on September 27, 2019 at 12:50 PM PDT by

There’s an old saying, “May you live in interesting times.” Some might find that a positive sentiment, but it’s easy to see it as a curse.

The drumbeat of headlines these days feels nonstop. Politics, conflict, instability abroad and more. Yet the stock and bond markets seem unfazed.

How do people do it? How do they invest in turbulent times without losing sleep?

It’s important to take into account the fact that the markets march to a drummer most people cannot hear. As with any large, complex social system, the cues are not immediate or obvious.

Like ants swarming or a massive flock of birds, there’s an order to it all but one that cannot be easily discerned — except perhaps at a distance.

In the investment world you can think of distance as time. The longer you invest, the more obvious it becomes that the day-to-day gyrations of the markets are not the story that matters, no more than a single ant or a random bird diving in the air.

Rather, it’s the long-term outcomes that matter. The ants manage their business quite well. The bird migrate and build their nests without concern for us.

And the stock market will either go up or down irrespective of what you might have read or think you know about the world around you.

Sometimes there will be bad news — even war — and stock prices will rise. Sometimes, even often, it’s when things seem to be going well that stocks tumble.

Only months and years later will academics piece together what triggered the exit and why so many people decided to sell. Even then, all of these “answers” will be missing something important.

Any attempt to connect the dots after a market crash will necessarily involve assigning motives to thousands and even millions of individuals. Some of them may have been prompted by the events under consideration, say, falling housing prices, the cost of oil, or lack of credit.

Herd behavior

But many more will simply have sold (or bought) because others around them were selling (or buying). Herd behavior is dangerous, and investors are not immune to it.

Did a hundred cows bolt across a pasture because one bird flew overhead? No. One cow bolted because of the bird and the rest panicked and started running.

Every investment transaction has two sides: seller and buyer, buyer and seller. Any time investors chose to leave a stock or set of stocks, there have to be buyers on the other side to help them leave.

What do the buyers know that the sellers don’t? Often, nothing. They simply aren’t participating in the panic. There’s always a few cows off to the side of the pasture thinking “Why are they all running?”

The trick to staying invested in turbulent times is making sure you own a wide variety of investments, which is diversification. As some fall others are likely to rise, reducing your itch to panic along with everyone else.

Another trick is to remember that all investments that go up also eventually go down by some measure and vice versa. Many, even most, eventually return to their long-term average price, known as reversion to the mean.

Your ability to maintain composure in “interesting times” is the key to successful investing over the long run. It’s not easy, but diversifying your investments can help.

MarketRiders, Inc. is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.