At the Money: Staying the Course

This is the podcast Spotlight Hour on Bloomberg Radio.

There are countless factors that distract investors from their best laid plans. Markets go up and down, bad news comes out, companies miss earnings estimates, Economic data disappoints, to say nothing of the endless parade of geopolitical events. It's not too hard to see why staying the course can be a challenge for investors.

We'll stay.

As it turns out, there are strategies that long term investors can use to avoid the pitfalls. I'm Barry Riddhelts, and on today's edition of At the Money, we're going to discuss how to stay the course over the long run.

To help us unpack all of this and what.

It means for your portfolio, let's bring in Larry Suedrow, head of financial and ECONO research at Buckingham Strategic Wealth. The firm manages or advisors on over seventy billion dollars in client assets, and Larry has written or co written twenty books on investing. So Larry, let's start with a simple question. Investing is supposed to be for the long term. How hard can that be?

Investing is actually very simple, but that doesn't mean it's easy. And the difference is that markets go through tremendous gyrations much more frequently than people think. On average, we get one month a year that could go down ten percent. We've had six big recessions in the last forty years and major bear markets during those periods. When you get those big drops, investors tend to panic, They engage in

Be a rip Van Winkle investor, just rebalanced.

So let's get into the specifics. What sorts of issues do you see that getting the way of investors staying the course? What are the big distractions that take them off of their plan.

First thing I would say is recency bias is a huge problem. Investors tend to project what's happened in the recent past and definitely into the future. So for example, today AI is hot, so they think AI will be hot forever, and prior it might have been biotechnology or

Telling you to be that sur buyer.

One quick example, three periods of at least thirteen years with the S and P underperformed T bills twenty nine to forty three, sixty six to eighty two, that's seventeen years, and then twenty two thousand to twenty and twelve even a forty year period where small cap and large cap growth stocks underperformed twenty year treasuries. The riskless investment for a long term pension plan.

What about market crashes?

Shouldn't investors get out of the way before the market crashes and then jump back in after it's done.

Yeah, certainly if you could predict that. The problem is there are no good predictors. One of the great anomalies. I even wrote a book about this, Think, Act and invest like Warren Buffett is. Buffet is idolized that people tend to do not only ignore his advice, they tend to do the opposite.

Buffett says, never try to time the market. But if you're going to do so, be a.

Buyer when everyone else is panicking, and then be a seller when everyone else is being greedy. A great example, Barry in recent times was much of two thousand and twenty recession.

If you had a perfect crystal ball.

We went into recession in the second and third quarters, and the market bottom down well before that happened, and the rest of the year the stocks returned, of my memory, served something like fifty percent or something like that in those next nine months, from the middle of March when at bottomed do owt to the end of the year. That's a great example of why you don't panic. People

I've seen some data that suggests you just have to miss the worst couple of days and your performance improves dramatically. What's wrong with that line of thinking.

The odds of your identifying those days are close to zero.

That's what's wrong with that. And of course the other side is also true.

A huge part of the returns happen over very short periods, and yet it's virtually impossible predicted. Again, here's an anomaly. Both Peter Lynch and Warren Buffett, maybe the two greatest investors of all time, to investors you should never try to time the market, and neither one of them has ever met anyone who has made a fortune by trying to time the market.

And I've also seen some data that suggests that those best days in those worst days come clumped very close together. So if you're fortunate enough to miss the worst day, the odds are you going to miss the best day also.

Now that's because again governments take action, come in and try to counter it, and then you know, everyone who was panicked and sold now has to you know, unwind those positions, and the shorts have to come in and cover as the market starts to recover.

So forget crashes, nobody's really going to time those wells. But what about recessions? What should investors do when a recession is on the horizon and coming your way.

Anyone who's read my books and my blogs I've written something like seven thousand now knows that I try to tell people that you should make decisions based on empirical evidence, not opinions like you hear on CNBC or a Bloomberg or whatever from some guru. And the evidence is pretty clear. Barry, I think this might even shock most people. We've had six recessions since nineteen eighty. The market has bottomed out before the recession was declared.

Four of the six times.

So even if you could predict when it would happen, just like in twenty twenty, would have done you no good. You would have predicted recession, got it out, and the market took off.

So let's talk about performance. I know you crunch a lot of numbers, and in the books of yours that I've read, I always see a lot of data. The people who just buy and hold and put it away for twenty years, how well does their performance compare to those people who were either trying to avoid a crash or trying to avoid a recession.

What does the numbers say?

The research does show that the more people act, the worse their returns are.

The more they trade, their.

Worse their returns are as they drive expenses number one, and they pay more taxes.

That data is very clear.

Good studies by Terrence Odein and Brad Barber, for example, have looked at that. In morning Star runs data showing persistently that the investors earn lower returns and the very funds they invest in, which means that they had simply done nothing. They would have done better, but they'd done even better than that if they rebalance, which would cause them to sell high and buy LUW, not the reverse, which is what they tend to do.

Just do something. Sit there is the best advice for those.

Two things you want to do. You don't want to try to pick stocks at time the market. You want to stick to your plan and that means you have to act by rebalancing.

And the other thing.

You want to do is tax loss harvest to get Uncle Sam to share in your losses when they do occur, and they certainly will occur.

So let's talk a little bit about fear, and greed. All of these things we're discussing often cause investors to become emotional or fearful. What do you do when you have a client who calls up and says, Hey, I'm not sleeping at night, I'm stressing over the market. I got to do something. You got to make the paint stop. How do you advise those folks.

The only way to address this properly is you have to have the plan in place in the first.

Place, so you have to be prepared.

Investors have to understand that investing is about accepting risk.

That's a good thing. Volatility is a good thing.

And the reason is it creates the big equity risk premium. If stocks would always go up, then there'd be no risk and the equity risk premium would disappear and you get CD or Treasury bill like returns. So you want that volatility. But the key is you cannot panic and

Panic and sell.

Now that's what we see, and then it's never safe to get back in. Never have I seen a day in twenty my thirty years in this business where I could say, gee, it's really safe to be an investor, because we know there are all kinds of black swans out there that can occur tomorrow, like COVID nineteen as just one example, the Black Monday in eighty seven as another. I mean taleb has written about this a lot, these

So let's talk about the opposite of fear. Let's talk about greed. What do you say to a client who calls up and says, hey, AI is the future, and I got to get me some of that. I don't care what it is, Buy me a dozen different AI companies because the train is leaving the station and I don't want to be left behind.

Yeah.

Well, if it was that easy, then the vast majority of professional investors who have now today PhDs, not only in finance, but in nuclear physics, mathematics, they would outperform. And yet the evidence is clear. All you have to do is look at standard and poor spever results persistently over the long term, even before taxes, over ninety percent of the active managers underperform, and there's no evidence of any persistence beyond.

The randomly expected.

So manager who wins the last three years, that tells you nothing virtually about the.

Next three years.

So why do you think you're going to be able to outperform? What advantage do you have over these geniuses who get to spend one hundred percent of their time doing it where you're doing it as a part time you know, enjoyment. Maybe the odds are close to zero you will succeed.

So to wrap up, invests who have a long term time horizon that's not five years or even ten years, but twenty years longer, should expect distractions along the way. There are going to be recessions and market crashes and geopolitical events. Investors need to understand that's just part of the normal landscape.

Markets go up and down, but the.

Biggest Winners are those who stay the course and hold for the long haul. I'm Barry Ridholts and this is Bloomberg's At the Money