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By Rob Clarfeld | Chief Executive Officer, Clarfeld
Thanks to technology, today’s investors have an abundance of data at their fingertips to make investment decisions a little easier. Even so, despite the wealth of information, investing always has, and will continue to be, a human endeavor vulnerable to human emotions.
The most common one is fear.
In difficult economic times, it’s human to want to flee the market and leap toward the perceived safety of cash. The fourth quarter of 2018, which saw declines in virtually every asset class, is a perfect example. Though experts debated the reasons (an aggressive Fed, declining energy prices, China trade war concerns) and whether it was a market correction or the start of a full-blown recession, all agreed that it was an uncertain and unsettling time. However, as the beginning of 2019 proved, market declines do not last forever, and those who hastily fled to the safety of cash may have learned that their fears — not the actual market conditions — ended up costing them more.
For some, leaving the market for cash may provide short-term relief. But to achieve long-term results and success, investors cannot remain in cash forever. At some point, they’ll need to re-enter the market, which requires successful “market timing,” a skill that has eluded even the savviest of investors.
I discussed the subject of market re-entry in December 2017. At that time, equities were flourishing (the S&P 500 had gained nearly 22%), and investors were considering pulling out to avoid the perceived inevitable correction. I wrote:
“When you pull out of the markets [for the safety of cash], no re-entry point feels safe. Should the markets continue to rise, the fear of being whipsawed by coming back in at higher prices just before the great fall — which you predicted when exiting — is really scary. Should your exit be followed by the decline you predicted, you feel that you were right, and rarely have the comfort to re-entry, as prices continue to fall. Very few nail either exit or re-entry points correctly with consistency.”
No matter how unsettling market conditions can seem, investors must put aside their fears and adhere to the most basic tenet of successful investing for the long-term: strategic asset allocation. While riding out rough markets and rebalancing underperforming assets may be challenging, history has proven that this discipline, not fear and knee-jerk decisions, is the best course of action.
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