Wise Wealth Management

Dennis Covington | Principal

Insights on the keys to enjoying a "healthy wealth".

The "Whac-A-Mole" Approach to Investing

October 2012

“The Market seems uncertain to me right now; maybe I should take some equity investments off the table”.

This statement, or a derivation of it, is commonly put to advisors such as me. The evidence is strong that many investors share this feeling and are acting on it as they continue to flee equity investments for cash and bond investments despite yields that will deliver a negative real return (yield minus inflation) for the foreseeable future.

The first thing I like to point out is that the market is always uncertain. And the funny thing about uncertainty and the market is that when there is more uncertainty it generally means good things for near-term equity returns.

Think back to March of 2009. Was there a lot of uncertainty in the market? Probably more so than at any time since the Great Depression, and yet since that point the S&P 500 has gained 130%. And recall the fall of 2011, when the U.S. had just seen its credit rating downgraded and the stock market had plunged 20% in short order. Anxiety and uncertainty filled the air, and yet since November 2011 the S&P 500 has gained 28%. To be a successful investor you have to accept that the only certainty in investing is uncertainty.

The second thing to keep in mind is that it’s natural to wonder and worry about how the crisis of the day (election, debt/deficit, gridlock, Iran, Spain etc.) will impact our economy, our investments and our ability to achieve our goals. The heart of the matter is what we do with that worry.
For me it helps to view these crises like the old arcade game “Whac-A-Mole.” You will recall that the game really has no point other than to try and whack as many moles that pop out of their holes as fast as you can. The moles never stop popping up until the game is over, when you are left exhausted and wondering what the whole point was. Meanwhile the girl you were trying to win the stuffed animal for got bored and is walking around the park with some other guy. (But I digress…)

In the same way, investors who attempt to respond to every crisis that pops up will find all their energy and emotion devoted to an endless loop of crisis and response, with the response usually coming too late to do any good. Meanwhile, life passes you by as you worry about the short-term things beyond your control instead of trusting in the long term ability of the market to weather the never-ending storms.

My advice is that the next time you find yourself emotionally wrestling with the crisis of the day, step away from the Whac-A-Mole game and talk to the girl instead.

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