I ask because we can usually expect a rush to do exactly that in a new year, even more so when the previous year was as unpredictable, unstable and unsettling as what we’ve just experienced.
by Alan Friedman
Well, the answer is a resounding “no,” and that’s not just me talking. There are numerous successful investors, analysts, and economists who feel the same way — and have written countless articles, blogs, newsletters and books about it.
John Kenneth Galbraith, a noted Canadian-American economist, diplomat, public official, intellectual and author, famously summed up his thoughts on the subject in less than 20 words — “There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.”
Which begs another question.
What, then, can we expect, how can we be sure we’re making the right decisions?
When it comes to investing, one of the best predictors of the future is the past. And this is why it matters.
So much of investing is about cycles. There are economic cycles, business cycles, interest rate cycles and stock market cycles, to name a few. All interrelated, All inevitable. All influenced by “the market cycle of emotions.”
Also inevitable is that over the long term the markets go up. Which, unfortunately, we tend to forget when they drop quickly — like they did in 2022.
And instead of remembering that periods of uncertainty have happened before, we so often let our emotions get the better of us — and run the risk of making bad decisions and missing out on the pre-destined recovery.
Which reminds me of this Shelby Cullom Davis quote: “You make most of your money in a bear market, you just don’t realize it at the time.
It is in our best interest to understand cycles and how they work. Recognize the patterns. Let the past show you the way. And above all stay the course, remain calm and focused. Have a disciplined investment strategy and do not let your emotions get in the way.
Know your risk tolerance and that time heals most every setback.
And remember that we have much less to fear from market fluctuations than from how we react to them
Think about that for a moment. What’s it telling us? I’ll tell you what it says to me:
That when we pay close attention to market cycles we realize there’s an inevitability to investing. The markets go up and the markets go down. They always have and they always will. And nobody — nobody — knows when.
Where we’re at in the cycle tells us what our next moves should be — whether it’s assessing our asset allocation, investing more, investing less or doing nothing.
So there is nothing for us to get anxious about. The key is to remain calm, focused, disciplined and strategic. Here’s a chart that lays out the market cycle of emotions very clearly and simply. Keep it handy and look at it any time you feel your emotions getting the better of you:
Chart shows the range of emotions. From left to right: optimism, excitement, thrill, euphoria (point of maximum financial risk), anxiety, denial, fear, desperation, panic, capitulation, despondency (point of maximum financial opportunity), depression, hope, relief, optimism.
Adapted from Westcore Funds /Denver Investment Advisers LLC, 1998
First off look at the range of emotions on this chart. They run the gamut from the optimism and excitement we feel when the state of the world and the economy are stable and we’re enjoying good returns … to euphoria, when the markets are really performing well and we think it will last forever and that we can do no wrong — which is exactly the time we’re at risk of making costly mistakes — taking chances without considering our tolerance for risk, for example.
Look at how our emotions go up and down like a yo-yo. How from that euphoric state we can quickly find ourselves despondent when returns turn negative again, which they inevitably do — only to find ourselves optimistic again, when the cycle changes and the investing climate improves again —which is also inevitable.
Upon reflection none of this is surprising. Setbacks come and go, they are temporary, they will pass. And as long as we are patient, disciplined and strategic we will, once again, be rewarded.
We’ve been here before and we’ll be here again. And that should teach us something. So let’s make 2023 the year we look at the past for a blueprint of the future. A successful future.
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Alan Friedman is an Investment Advisor with CIBC Wood Gundy in Toronto. The views of Alan Friedman do not necessarily reflect those of CIBC World Markets Inc. CIBC Wood Gundy is a division of CIBC World Markets Inc., a subsidiary of CIBC and a Member of the Canadian Investor Protection Fund and Investment Regulatory Organization of Canada. If you are currently a CIBC Wood Gundy client please contact your Investment Advisor. Clients are advised to seek advice regarding their particular circumstances from their personal tax and legal advisors.