One of my favourite authors as a child was Charles Dickens.
I would read Oliver Twist over and over.
Dickens had a way with words.
And today’s stock market reminds me of his famous quote.
Here it is.
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness…”
Recently, the stock market has made us feel almost every emotion.
Currently, it’s “the best of times” as the market continues to hit new highs.
From a low of 2,237 in March 2020, the S&P 500 has doubled.
Over the 10 years through July, the S&P has delivered an average annual return of 15.4%, including dividends, far above the historical average of 10%.
Since the downturn in 2009, the market has logged just one negative year: In 2018, there was a modest, all-but-forgotten decline of 4.4%.
So why would anyone say it’s also the worst of times?
The worry is that things are too good.
Investors have enjoyed seeing the numbers on their financial statements climb for over a decade.
With every step higher, there is farther - potentially - to fall.
And it isn’t just the stock market.
With interest rates near all-time lows, the potential for losses in the bond market has also grown.
As investors, we’re all taught to think long term.
Everyone understands the market can be unpredictable and volatile from year to year, so you’re supposed to stay focussed on the horizon, not the day to day.
But there’s a difference between what we know we should do and what we’re actually capable of doing.
While the overall market results cited above have been very positive, it hasn’t been a straight line.
The pandemic left millions unemployed and has turned some industries upside down.
The financial markets are also displaying excesses - from cryptocurrencies to meme stocks - that make people nervous.
This skittishness isn’t just affecting those currently invested.
You also see it among those sitting on the sidelines, too nervous to put money into a market that appears “priced for perfection.”
In an environment like this, how can you keep your investment cool?
Below are six ideas:
1. Remove emotion
Whether you work with a planner or not, draw up a formal investment policy statement.
The first part of mine is to establish an evidence-based investment philosophy which underscores the key components such as be patient, be disciplined, have faith in capitalism, have confidence in the markets and understand volatility.
You can spell out your strategy, including asset allocation targets and rebalancing rules.
Then try to stick it
The second part of mine is about the creation and maintenance of a robust portfolio that can weather different conditions...
Avoiding high costs.
Managing risks over time.
Taking only sensible risks and diversifying broadly.
This can be valuable in an environment like today’s, but it can be even more helpful when the market goes haywire.
Consider what stocks did early last year.
The market plunged more than 30% - its quickest decline ever.
Investors who had asset allocation targets and rebalanced according to their plan benefitted massively during the ensuing rebound.
2. Forget forecasting
The stock market can make the smartest person feel clumsy.
Again, think back to last year.
Many predicted doom and gloom across different industries.
Of course, things turned out better than expected.
As a result, the investor who fared best was the one who didn’t tinker.
There’s only a loose connection between effort and results when it comes to investing.
Underpinning your decisions with good investment governance such as screening for new funds, incumbent fund reviews, process improvement and portfolio structural review will substantially improve your likelihood of compounding your long-term returns.
3. Take the long view
The legendary late Jack Bogle, founder of Vanguard Group, urged investors to think in terms of decades.
The market is entirely unpredictable in the short term but at least a little bit predictable in the medium and long term.
If the market is high today, for example, it might be even higher next year.
But prospective returns over the next decade will be lower following a dozen years in which results were so far above average.
So if you’re in retirement or retiring soon, you’ll want to build a financial buffer into your plan.
4. Consider history
Investment commentators love debating whether the market is headed higher or lower.
But these debates usually aren’t productive.
I’m not predicting that the market will go down or that it’ll go up - in the near term.
Instead, I’m predicting that over the long term it will go higher.
That’s where I find history instructive.
5. Have faith
In recent years, I’ve heard growing murmurs that America’s economy is starting to crumble—and that we’re headed for a long period of malaise like Japan or even the Roman Empire. Are those things possible? I suppose.
But I’ve also heard powerful arguments to the contrary.
Larry Siegel’s 2019 book Fewer, Richer, Greener argues that we’re entering a period of unprecedented prosperity.
I’m not sure which version of the future we’ll see.
No doubt there will be other unnerving events in the decades ahead.
Still, I believe history’s lesson is clear:
Our economy - and our markets - will continue to prosper over the long term.
Have a documented financial plan and stick to it.
Invest sooner rather than later.
And keep your cool when the markets test you.
Your resilience and discipline will be rewarded over the long term.