Investor Live Fire Testing
A long-haul cargo plane pilot described his job as hour upon hour of boredom interspersed with moments of sheer terror. That’s a pretty good description of the stock market. There are long periods when not much happens. And then there are times like these, with war in the Middle East bringing volatility and a heightened sense of uncertainty.
But there’s a big difference between a jetliner in trouble and a market in trouble. For pilots, such moments require quick decisions and immediate action. For investors, the best response is to do… nothing. Nothing? That’s right, nothing.
And that can be extraordinarily difficult. But a sure sign that you are investing well is that when the market goes crazy you are willing and able to stay with your investment strategy. At times like these, it’s all about your perspective and your practices.
A Good Investment Perspective
A healthy biblical perspective on investing is about trusting that God is in control, and that he knows your needs and has promised to provide for you. It’s about saying, “Okay, Lord, I’ve done all that I know to do to manage your resources well. It’s painful to see investment losses, but I know that you are in charge and my trust is in you. Please give me wisdom and peace.”
It’s also about patience. The Bible says, “Steady plodding brings prosperity; hasty speculation brings poverty” (Proverbs 21:5). Biblical investing is slow and steady. Doing the right thing a little at a time over a long period of time. Keeping a steady hand on the wheel when things get rough.
And just as the Bible teaches us to be patient, so does market history. Of all the daily market moves since 1926, about half were positive. In other words, on a day-to-day basis, you have about a 50 percent chance of making money in the market. However, the longer you stretch that time frame, the greater your chances of making money. Some 62% of one-month periods have been positive, 79% of the one-year periods, 94% of 10-year periods, and 100% of 20-year periods.
The investing journey is filled with lots of ups and downs, but time is on your side.
Knowing some market history is an important part of a good steward’s perspective on investing.
Good Investment Practices
Navigating crazy times in the market is also much easier if you’ve made it your practice to follow a trustworthy investment strategy. Remember, a trustworthy investment strategy is marked by:
Objectivity. Especially at times of market stress, when your emotions are screaming, you need an objective, rules-based strategy. This is not the time to let your emotions sway your decisions.
Demonstrated effectiveness. Knowing how the strategy you’re following has fared during past market disruptions can help manage your expectations. If you know that the strategy you’re using has a track record of delivering the returns you need, even though it has had its share of ups and downs, that can help you stay with it.
Emotional acceptability. That means the returns your strategy has delivered have come at a level of volatility you can live with. When you know the strategy you’re using tends to be about 25% less volatile than the market, that can help you handle a 6% decline, especially when the market falls by 8%. That tells you your strategy is performing as it should.
Ease of understanding. You should be able to describe to a middle school student how your strategy works. If your strategy is something of a black box to you, a mystery, that can cause anxiety at times of market stress. By the same token, being clear about how it works can help give you peace.
The True Test
Whether you’re a pilot or an investor, the true test of your abilities comes during an emergency. If you have money in the market right now, how well have you dealt with all of the recent volatility? What does your response say about your perspective about investing and your investment practices?
Take it to heart: “Whoever gathers money little by little makes it grow.” – Proverbs 13:11