Buffett-ism for this Moment 10/1/22

Hello NFC Clients and Friends,

Warren Buffett is a wellspring of homespun, profound aphorisms that will undoubtedly stand the test of time. One of my favorite Buffett-isms certainly applies today: “Only when the tide goes out do you discover who’s been swimming naked.” However, this sage observation relates more to the preparations one should have made before heading into the ocean. During volatile markets, I find more comfort in another Buffet quip: “Be fearful when others are greedy, and greedy when others are fearful.” Easier said than done.

As I write, year to date the S&P 500 has fallen -25%, the DOW -21%, and NASDAQ -33%. Mileage will vary de-pending on the construction of your investment portfolio, hopefully built to serve your specific needs and goals. For example, according to Personal Capital, the free online FinTech tool I recommend to all NFC clients, the Normans’ portfolio is down -23% YTD. So yes, I feel your pain. Truth be told, I feel more “fearful” than “greedy.”

Behavioral finance reminds us that we are all subject to recency bias. As a result, this current pain/fear tends to overwhelm rational processing of events. Expanding our perspective to a 5 year time frame rather than the first 9 months of 2022, we can see that a US stock portfolio is up +54%. In 10 years, the number climbs to an impressive +196%, and neither of these numbers include the reinvestment of dividends and capital gains, nor dollar cost averaging. It does include our recent cliff dive from our all time highs. The fear is real and growing as the Federal Reserve continues to raise interest rates in an effort to fight off significant inflation, previously deemed “transitory” by Chair Powell (March, 2021). Apparently the Fed Chair’s crystal ball is no better than yours or mine.

Fear is real, exacerbated by external events like a plummeting market, persistent inflation, looming recession, to say nothing of growing geopolitical concerns. Fear is also palpable, thanks to our amygdala which kicks the “fight or flight” response into action. An evolutionary hangover, this innate biological response to a 21st century stressor— a falling stock market— is wholly inappropriate for coping with the situation. Jolts of adrenaline and the corresponding physiological changes in our bodies might help to fight or flee a saber tooth tiger, but are completely useless in helping us make rational decisions to protect our financial well being in times of stress. Moreover, loss aversion keeps a thumb firmly affixed to the trepidation side of the fear-greed scale: we feel real or potential loss more acutely than we do for an equivalent gain.

Greed is also real and similarly subject to the cognitive biases and reinforcing physiological mechanisms complimentary to those described above– hello dopamine! Lest we forget how good it felt to double our investments over the past 3 years as the market returned +30%, +16%, and +27% in 2019-2021, respectively.

The conundrum: Our brains are wired to make us feel greedy when times are good (buy high), and disproportionately fearful when times are bad (sell low). If you buy when you “feel” good/greedy, and sell when you “feel” fearful you lose, regardless of the game you are playing.

So what are we to do in times of volatility in a decidedly down market with more headwinds than usual during hurricane season? The real question is what do you do, as we are not all playing the same game. As I contemplate retirement in my 29th year of teaching, some of you are just starting your careers, and others are already retired. The majority of you are somewhere in between, starting/growing families and/or considering a change in vocation. Sequence of returns risk means nothing to many of you, and a great deal to others depending on what game you’re playing, and how much time you deem is left on your main career clock. Moreover, our goals for our lives are incredibly diverse.

So what are you to do? Well, annoyingly, that depends on who you are, where you are in your journey to financial freedom, and your goals. On what it shouldn’t depend: how you “feel.” This is why it might be a good Idea to work with a fiduciary who can see your situation objectively, and remind you that emotion should not be the driver of your decisions when it comes to financial planning. Such a person might remind you that the stock market always goes up in the long run, up roughly 3 out of every 4 years, and that downturns are simply part of the business cycle, and to be expected. The Sky is Not Falling today as it wasn’t in June when I first posted on this subject– it may be worth a (re)read. Our recent market crisis du jour can be rationally viewed as opportunity rather than setback, and behaving as such, regardless of how we “feel,” can make a huge difference in the long run.

I may retire from my day job in the near future, but the money-making machine we have built over the decades is designed to grow and provide growing income for decades to come. We are not pulling the plug on it simply because it is not presently firing on all cylinders as it had been for the previous 3 years. In the meantime, the machine continues to generate dividends, and will reinvest in itself at lower price levels, spring loading it for the inevitable return to fully operational status. At that time, I may need someone to remind me not to act “greedy.” For now, I encourage each of you to embrace the discomfort we all feel now, and focus on the things we can control like our rate of saving, investing, and giving. And, if I may be so bold, to consider being “greedy when others are fearful,” even when we count ourselves in the “others” camp.

If you need help sticking to your written investment plan during a scary time in the boom-bust cycle, feel free to reach out. More help with your feelings? Call Dr. Phil.

Yours in education and financial fitness,

David https://www.normanfinancialcoaching.com