With the relentless rise of equities over the past year, several clients have inquired of me whether they should be more aggressively postured with their investment portfolios. Sensing that, for some, prior fears of market downturns have now been replaced with ‘fear of missing out’ (or “FOMO,” as the term goes), I am always quick to remind them to think back over the past ten years and to remember how emotionally exhausted they all were during the declines of 2010-2011 and 2015-2016, let alone during the breathless descents of 2008-2009.
The truth is that discipline on the way up matters just as much – and is arguably harder to maintain – than discipline on the way down. For example, if you are caught under-invested when a bear market ends, your biggest fear is incurring a little bit of opportunity cost. However, if your portfolio is caught overextended when a bull market ends, you face the far more dangerous likelihood of capital destruction, and oftentimes that coincides with periods when you need capital the most, such as in retirement.
In the United States, investors have been spoiled with drawdown periods (a polite way of saying “crashes”) that have not lasted all that long, at least in nominal terms:
Investors elsewhere, however, have not been so fortunate. For example, Japanese shares (in dollar terms, and on a total return basis), have only recently regained the plateau first reached nearly three decades ago:
I am sure that during the roaring Japanese bull market of the 1980s there was also widespread ‘fear of missing out,’ but once it burst, I am sure there was also relief at having missed out, at least among the (likely) few who managed to maintain their disciplined and diversified postures throughout.
Nobody knows, obviously, when the cycle will turn, and how long the ensuing drought for equities will last. Nobody even knows what shape the next bear market will take, or what strategies will help them survive it. With interest rates at multi-decade lows, and with duration on long bonds about equal to that on equities, a bear market driven by inflation will likely crush both stocks and bonds. It seems doubtful to me that after a decade of no returns on cash that investors have sufficient short-term liquidity in the event of a simultaneous stock and bond bear market.
This is not groundbreaking, but it cannot be said enough: since investors cannot control the future, they should instead tend to those things they can control. These include keeping fees to a reasonable minimum, limiting the taxman’s take, diversifying sufficiently, and rebalancing frequently. These are simple strategies, but forcing yourself to utilize them when the market is rising continuously can be difficult.
I will close with an apt quote by powerlifter Josiah O’Brien, who explained why he worked so hard to rehabilitate from a disastrous injury and compete again: “There are two pains in life: there’s the pain of discipline, and then there’s the pain of regret. You choose which one.”* Investors today should consider and choose wisely.
*I believe this quote is originally from Jim Rohn
