Wise Wealth Management

Dennis Covington | Principal

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

Why "Doing Something" Is Usually The Worst Thing Investors Can Do

November 2013

"The market feels overvalued."

“How can it keep going up?”

“Maybe we should take some profits off the table.”

“I was wrong….I stayed in cash way too long, but I can’t put this money in the market now. Let’s wait for the next market pullback.” 

These are a few of the statements I’ve heard from prospects or clients over the past few weeks. It’s enough to make a wealth manager wonder which market environment is more worrisome to investors – a long down market or a long up market!

It is a happy fact of 2013 that stocks around the world have soared. Despite all the political trials and tribulations this year, a globally diversified portfolio of stocks has done quite well, gaining more than 30% over the past 12 months.

Many investors, still emotionally scarred by the events of 2008-09, are becoming anxious that we are due for a downturn and are wrestling with the urge to “do something” – such as trimming back on stock exposure, waiting to invest cash, or even getting out of the market altogether.

No one knows what the market will do in the short term, of course. Historically a bear market – defined as a 20% decline from the market’s peak – occurs about every eighteen months or so.  But that is a long-term average, and there have been many periods in the market’s history when stocks continued to surge much longer than the “experts” predicted. Investors who missed out on those gains cost themselves real returns their portfolios would have otherwise enjoyed.

The history of the stock market shows us two things: 1.) Stocks are on a continually upward trend over the long run; and, 2.) Investors who attempt to make short-term strategic moves in their portfolios almost always do more harm than good.

I think the following two-minute video from Dimensional Fund Advisors explains the reasons for this very clearly and concisely. I hope you’ll take a moment to watch it. And the next time the urge to “do something” strikes, I hope you’ll pick up the phone and call us. I’m confident we can help you keep your perspective on the market and have a productive conversation about your goals and the best strategy to achieve them. 


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