As of late, it’s hard to be invested in stocks and not feel like you are on a roller coaster. It seems that every day has the potential for a huge up move or scary down move. We often call this “volatility”, but whatever the name, it’s tough to watch.
Here’s what we think is important to keep in mind. While stocks do have solid long term returns, those returns do not come in a straight line. If you look at any 20 year period, you will see great years and awful years. If you look at shorter periods, like months, the extremes are more pronounced, especially to the downside.
It is the nature of markets to go through periods of excess and retrenchment. That’s not a reason to avoid investing, but it certainly makes sense to get an idea of where markets are at any given time before you invest. It’s like checking the weather before making outdoor plans, it makes sense to check what season the stock market is in before deciding to be invested in stocks.
This is not what most investment professionals suggest. They will label this as “market timing”, saying that no one can do it successfully and that buying and holding a diversified portfolio is the only way to be sure you take advantage of the long term returns of stocks.
Our view is different.
We believe there are “seasons” in which stocks are, in general, more attractively priced than at other times. When you buy stocks during these periods of favorable valuations, you increase your odds of better returns. Alternatively, if you buy stocks during periods of less favorable valuation, you decrease your odds of better returns. How you measure those periods is different than what you hear in short snippets on financial TV. We appreciate the excellent work of John Hussman in this regard.
That does not mean investing is as simple as buying relatively cheap stocks and making money. This strategy can underperform (relative to the overall market) for long periods of time. It is essential that you understand your strategy fully and consider market conditions.
Even during the less attractively priced seasons, stocks can go up! Positive returns can come from buying the stocks that are doing the best and riding their coattails. This is the type of market we have been in for the last several years, but if the past is any prologue, this will end.
Studies do show that over the long term, stock market returns are solidly positive. But that does not mean your personal returns from today forward will fit that same pattern! We believe it is vital to understand the current market climate as you make investment decisions.