Wednesday, April 10, 2024
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At the Money: Staying the Course



At the Money: Staying the Course (April 10, 2024)

Markets go up and down as news breaks, companies miss earnings estimates, and economic data disappoints. It’s not too hard to see why staying the course can be a challenge for investors.

Full transcript below.


About this week’s guest:

Larry Swedroe is Head of Financial and Economic Research at Buckingham Strategic Wealth. The firm manages or advises on $70 Billion in client assets. Swedroe has written or co-written 20 books on investing.

For more info, see:

Personal Bio

Professional website





Find all of the previous At the Money episodes here, and in the MiB feed on Apple Podcasts, YouTube, Spotify, and Bloomberg.






Barry Ritholtz:  There are countless factors that distract investors from their best laid plans. Markets go up and down: Bad news comes out, companies miss earnings estimates, economic data disappoints, to say nothing of the endless parade of geopolitical events.

It’s not too hard to see why staying the course can be a challenge for investors.

As it turns  out, there are strategies that long term investors can use to avoid the pitfalls. I’m Barry Ritholtz, and on today’s edition of At The Money, we’re going to discuss how to stay the course over the long run.

To help us unpack all of this and what it means for your portfolio, let’s bring in Larry Swedroe, head of financial and economic research at Buckingham Strategic Wealth. The firm manages or advises on over $70 billion in client assets, and Larry has written or co written 20 books on investing.

So Larry, let’s start with a simple question. Larry Investing is supposed to be for the longterm. How hard can that be?

Larry Swedroe: Investing is actually very simple, but that doesn’t mean it’s easy.

And the difference is that markets go through tremendous gyrations much more frequently than people think. On average, we get one month a year that could go down 10%. We’ve had six big recessions in the last 40 years and major bear markets during those periods.

When you get those big drops, investors tend to panic. They engage in recency bias, think this will continue forever. Forget that governments take actions to counter the problems and they panic and sell and the evidence shows that results in them underperforming the very funds that they invest in.

And then the reverse is true in bull markets. They get over enthusiastic FOMO takes over and then they buy high and then expected returns are low. The key is have a plan, stick with it and do nothing. Be a Rip Van Winkle investor. Just rebalance.

Barry Ritholtz: So let’s get into the specifics. What sorts of issues do you see that get in the way of investors staying the course? What? What are the big distractions that take them off of their plan?

Larry Swedroe: First thing I would say is recency bias is a huge problem. Investors tend to project what’s happened in the recent past indefinitely into the future. So, for example, today AI is hot, so they think AI will be hot forever. In prior periods, it might have been biotechnology or dot coms, and that leads to them to react.

The second mistake is that they fail to understand that when it comes to investing, 5 years is not a long time, and 10 years isn’t even a long time — but they think 3 years is a long time, 5 years is very long and 10 years infinite.

And the problem is that you could go through almost every asset goes through at least 10 years of poor performance. And when you get even 3 years. They panic and sell what Warren Buffett would be telling you to be. That’s a buyer.

One quick example, 3 periods of at least 13 years where the S&P underperform T bills 1929 to ‘43, 1966 to 82. that’s 17 years and then 2000. to  2012. There’s even a 40-year period where small cap and large cap growth stocks underperform 20 year treasuries.

The riskless investment for a long-term pension plan.

Barry Ritholtz: What about market crashes? Shouldn’t investors get out of the way before the market crashes and then jump back in after it’s done.  Yeah, certainly if you could predict that the problem is there are no good predictors.

Larry Swedroe: One of the great anomalies, I even wrote a book about this, uh, think act and invest like Warren Buffett is Buffett is idolized. People tend to do not only ignore his advice, they tend to do the opposite. Buffett says never try to time the market, but if you’re going to do so, be a buyer when everyone else is panicking and then be a seller when everyone else is being greedy.

A great example in recent times was March of 2020 recession. If you had a perfect crystal ball. We went into recession in the 2nd and 3rd quarters, and the market bottomed out well before that happened. And the rest of the year, the stocks returned. If my memory serves something like 50 percent or something like that in those next 9 months from the middle of March, when it bottomed out till the end of the year.

That’s a great example of why you don’t panic. People forget that governments don’t sit there and do nothing. Central banks come in, cut interest rates, government and enact fiscal policies that try to get out of the recession.

Barry Ritholtz: I’ve seen some data that suggests you just have to miss the worst couple of days and your performance improves dramatically. What’s wrong with that line of thinking?

Larry Swedroe: The odds of you identifying those days are close to zero. That’s what’s wrong with that. And of course, the other side is also true.  A huge part of the returns happen over very short periods.  And yet it’s virtually impossible to predict. Again, here’s an anomaly.

Both Peter Lynch and Warren Buffett, maybe the two greatest investors of all time, told best investors, you should never try to time the market and neither one of them has ever met anyone who has made a fortune by trying to time the market.

Barry Ritholtz: I’ve also seen some data that suggests that those best days and those worst days come clumped very close together. So if you’re fortunate enough to miss the worst day, the odds are you’re going to miss the best day, also.

Larry Swedroe: And that’s because again, governments take action, come in and try to counter it. And then, you know, everyone who was panicked and sold now has to, you know, unwind those positions and the shorts have to come in and cover as the market starts to recover.

Barry Ritholtz: So forget crashes, nobody’s really going to time those wells, but, but what about recessions? What should investors do when a recession is on the horizon and coming your way?

Larry Swedroe: Anyone who’s read my books and my blogs, I’ve written something like 7,000 now, knows, that I try to tell people that you should make decisions based on empirical evidence, not opinions like you hear on CNBC or Bloomberg or whatever from some guru.

And the evidence is pretty clear: I think this might even shock most people. We’ve had six recessions since 1980. The market has bottomed out before the recession was declared, four of the six times. So even if you could predict when it would happen, just like in 2020 would have done, you know, good, you would have predict the recession got an app and the market took off.

Barry Ritholtz: So let’s talk about performance. I know you crunch a lot of numbers and in the books of yours that I’ve read, I always see a lot of data. The people who just. buy and hold and put it away for 20 years – how well does their performance compare to those people who were either trying to avoid a crash or trying to avoid a recession? What does the number say?

Larry Swedroe: The research does show that the more people act, the worse their returns are. The more they trade, their worst, their returns are as they drive expenses, number one, and they pay more taxes, that data is very clear. Good studies by Terence O’Dean and Brad Barber, for example, have looked at that.

And Morningstar runs data showing persistently that the investors earn lower returns than the very funds they invest in, which means that they had simply done nothing they would have done better, but they’d even done even better than that. If they rebalance, which would cause them to sell high and buy low, not the reverse, which is what they tend to do.

Barry Ritholtz: So don’t just do something, sit there is the best advice for those people.

Larry Swedroe: Two things you want to do. You don’t want to try to pick stocks of time to market. You want to stick to your plan and that means you have to act by rebalancing. And the other thing you want to do is tax loss harvest to get Uncle Sam to share in your losses when they do occur. And they certainly will occur.

Barry Ritholtz: So let’s talk a little bit about fear and greed. All of these things we’re discussing often cause investors to become emotional or fearful. What do you do when you have a client who calls up and says, “Hey, I’m not sleeping at night. I’m stressing over the market. I got to do something. You got to make the pain stop.” How do you advise those folks?

Larry Swedroe: The only way to address this properly is you have to have the plan in place in the first place. So you have to be prepared, Investors have to understand that investing is about accepting risk. That’s a good thing, Volatility is a good thing. And the reason is it creates the big equity risk premium.

If stocks would always go up, then there would be no risk and the equity risk premium would disappear and you get CD or treasury bill-like returns. So you want that volatility. But the key is you cannot panic and sell. Because that leads to bad results. Key is, as I’ve written in my books, you don’t want to take more risks than your stomach can handle. Because if you do, regardless of your knowledge of this, and the wisdom of the stay, the cost, your stomach is going to scream. When it reaches the GMO point, it’s going to scream, Get Me Out and you will likely panic and sell. Now, that’s what we see.

And then it’s never safe to get back in. Never have I seen a day in 20, my 30 years in this business where I could say, gee, it’s really safe to be an investor because we know there are all kinds of black swans out there that can occur tomorrow, like COVID 19 as just one example, the black Monday in 87 as another. I mean, Taleb has written about this a lot. These black swan events, they’ll come up and markets crash and you have to be prepared not only to do nothing, but to be able to rebalance, so you get to buy low. Like Warren Buffett.

Barry Ritholtz: Let’s talk about the opposite of fear. Let’s talk about greed. What do you say to a client who calls up and says, “Hey, AI is the future and I got to get me some of that.

I don’t care what it is. Buy me a dozen different AI companies because the train is leaving the station and I don’t want to be left behind.”

Larry Swedroe: Well, if it was that easy, then the vast majority of professional investors, who Have now today, PhDs, not only in finance, but in nuclear physics, mathematics, they would outperform. And yet the evidence is clear.

All you have to do is look at Standard & Poor SPIVA results persistently over the long term, even before taxes over 90 percent of the active managers underperform.  And there’s no evidence. of any persistence beyond the randomly expected. So manager wins the last three years. It tells you nothing virtually about the next three years.

So why do you think you’re going to outperform? What advantage do you have over these geniuses who get to spend 100 percent of their time doing it where you’re doing it as a. Part-time enjoyment, maybe. The odds are close to zero, you will succeed.

Barry Ritholtz: So to wrap up, investors who have a long-term time horizon, that’s not five years or even 10 years, but 20 years or longer, should expect distractions along the way. There are gonna be recessions and market crashes and geopolitical events.  Investors need to understand that’s just part of the normal landscape. Markets go up and down, but the biggest winners are those who stay the course and hold for the long haul.

I’m Barry Ritholtz, and this is Bloomberg’s At The Money.





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