Play The Cards The Market Deals You
There are things we know and there are things we don’t know. A first thing we know is that every single time the stock market has gone down, it has come back.
A second thing we know is that every single time the market has gone down and come back, it has gone on to set new highs.
And, a third thing we know is that a perplexingly large number of investors lose money in the stock market, despite knowing the first two things.
What we don’t know is what the market will do tomorrow.
As Randy Pausch pointed out, it’s not about the cards you are dealt, but how you play the hand.
The reason so many people lose, despite 20/20 hindsight, is that they don’t let time work for them. I get that. We don’t have forever. The older we are, the less time we have to recover. The uncertainty of further loss propels us to the sidelines.
The fact is that going to the sidelines has always been a flawed logic.
History tells us that if we stay in, we eventually recover. But the recovery may not come soon enough. We decide we’ll get out and get back in when things get better. We don’t like the cards we are dealt, so we want a new hand.
It’s easy to get out. It brings instant relief. Unfortunately, procrastination makes it all but impossible to get back in. What if I’m wrong? How can I be sure it’s time to get back in? What if the market is now above the price at which I sold out? Am I too late?
Don’t try to second guess.
Don’t try to draw to an inside straight. Getting out with the idea of getting back in later is trying to outsmart the market. It’s hard to outsmart something that doesn’t always make sense.
Because you are making decisions with other people’s money, I suggest you stick with what we know and leave the second-guessing to the competition.
We know that nothing works with certainty in the short-term.
The long-term may be crystal clear, but the short-term is murky. People with short-term time horizons have lost money picking individual stocks, indexing, buying and holding, tactically allocating assets; all of these methods being attempts to buy low and sell high.
We further know that, as Peter Lynch pointed out, there is often more money lost in preparing for a correction than in the correction itself.
Another thing we know is that the trend is up.
The day I was born, the Dow Jones Industrial Average closed at 189. The day I graduated from high school, the Dow closed at 726. The day I turned forty, it closed at 1389. The day I turned sixty, it closed at 10,530. Ad infinitum.
We also know that the market has always recovered.
From 1929 to 1932, the Dow fell 89%. It then rose 371%. From 1937 to 1942, that same Dow fell 52%. It proceeded to rally 128%. In 2002, the Dow fell below 8000. Here we are near 16,000. I think we can safely say the trend is up and markets recover.
And we know for sure that we can’t control the market. All we can control is our reaction to the market.
It’s up to us to set the rules. This world is full of nice people who want what they can’t have.
They want to save for retirement and college education for their kids, but they want to put off starting until it’s too late. They want to invest in the market when it’s going up and they want to get out before it starts going down. They want you to tell them what’s going to happen tomorrow. They are forever wishing things were different.
All we can tell them is that between the time they start saving for the future and the time they achieve their goals, the market is going to go up and down.
You will do your best to guide them to their goals safely. You will use your knowledge, your wisdom and your instincts to steer them clear of as much danger as you possibly can. You will hold their hands through the difficult times. You will do your best. You will meet the challenges head on. You will be there when you have nothing to sell.
But to wish that things were different is the greatest single waste of time on earth. We can’t change the ways things are. The stock market is going to do what it’s going to do. We must commit to and stick to the plan. We can’t change the course of events. We must play the cards the market deals us.
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