You’re likely familiar with the adage “what goes up, must come down.” It’s elegant in its simplicity. It’s easy to visualize. It’s even science: Every action must have an equal and opposite reaction. It is, as they say, conventional wisdom.
But is it true? For a thrown ball or bouncing on a trampoline, certainly. An airplane or an elevator? Depends on your definition of “must.” Our waistlines certainly offer no such guarantees. A child will only grow up and never down.
In the investment world, too, conventional wisdom has its limits. A bull market begets a bear market; the stock market is like a casino; the political party I don’t like is going to torpedo the economy. Each relies on the fallacy that investing is a zero sum game.
Let’s look at some ways to avoid letting the conventional wisdom get in the way of your financial goals.
Examine your asset allocations.
The conventional wisdom is that you need to know when the bear market will hit so your investments don’t get caught up in it. But many thought it would hit two years ago. If you believed that, and acted on it, you missed out on substantial gains.
There is an approach that requires takes away the guesswork. It begins with the premise you always want to buy low and sell high (that piece of conventional wisdom does hold true). In a bull market, you might be over-leveraged in one particular type of asset. This is an opportunity to mitigate your risk not by pulling money out entirely, but through diversification.
Check your biases.
Here are some fun facts. The bull market of 1982 effectively lasted until 2000. The 1877 bull market lasted in 1907. Bull markets don’t adhere to any particular timeline, historically. Why would we assume time’s up now?
Part of it owes to recency bias. The last economic upturn, driven by the housing boom, began and ended within the same decade. And in a game of winners and losers, we will do anything to avoid being the loser, even if it means leaving winnings on the table.
Alas, we are a loss averse species. We are also overconfident in our ability to know when losses are coming. Those who pulled investment dollars in the wake of the 2016 presidential election watched markets immediately recover after a brief dip.
Look past volatility.
Markets don’t like uncertainty, it’s true. However, the good news is that markets tend to do well over time. If you started investing in 2008, right before the Great Recession hit, odds are you are currently ahead of where you were.
This is worth keeping in mind as we look toward what promises to be a contentious political season. But remember, after every election, about half the country is content with the outcome. When Democrats win, Democrats invest more in stocks. When Republicans win, Republicans invest more in stocks. Having a politically neutral portfolio will help you meet your financial goals regardless.
Strategize for the long term.
Working toward tax-efficient withdrawal strategy will help you keep more of the money you save and help you stave off impulsive decision making in tumultuous times. Working with an advisor to understand your financial goals in concrete terms will help you avoid loss aversion.
The antidote to the poison of conventional wisdom is proper planning. Investing isn’t about making money. It’s about having money. Trying to outguess the experts and the pundits is a strategy for maximizing long-term risk. That might make you some money at various intervals, but a zero sum game has the sum of zero.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
This article was originally published in the Daily Herald Business Ledger.