The emotional desire to “get even and get out” does not translate into a wise investment strategy. Rather, it is a recipe for disaster over the long term.
The equity markets continued their march upwards throughout the first quarter of 2012 with many indices and individual stocks approaching their previous all-time highs. Since then, the market has staged a modest pull-back in prices accompanied with greater price volatility, resulting in an onslaught of conversations in the media where market experts discuss the merits of investors stepping to the sidelines now that they are “almost “even”. This has led some clients to call, wondering if it is time to sell their equity investments. Granted, the investment experience in the equity markets over the last decade has weighed heavily on many investors’ emotions. Given that backdrop, I can fully understand why one might be emotionally attracted to the opportunity to exit the markets at “almost even”. Objectively, however, this strategy is not sound.
The fundamental underpinnings of the stock market rest on the idea that the increased risk an investor assumes when buying equities will be rewarded by long term appreciation. By definition, therefore, investing in stocks is a long term proposition. Contrary to some seemingly popular thought, the market is not akin to a casino where walking away “almost even” would, in most cases, be a godsend. The stock market is made up of real companies with real assets producing real products for real people. Thus, investing in the market should be accompanied by a thoughtful, diligent and disciplined process. While companies may stumble from time to time, most companies that make it to the public markets have established businesses. Some may grow faster than others, some may suffer at the hands of bad management or corrupt managers, and some may have products that become obsolete, but most grow quite nicely over time.
The alternative to “almost even” implies selling the stocks and reinvesting in less risky assets. Today, those alternatives (cash or shorter term bonds) offer little, if any, return. When inflation kicks in (some would argue that it already has), holding a market basket of low yielding securities as a long term investment, makes even less sense. So, despite the difficult market environment that we have experienced over the past decade, we are optimistic about the future and see the glass as half full. Trimming positions to rebalance is always prudent. Getting out “almost even” may be a good strategy at the craps table but it is a recipe for failure for long term equity investors.
Denise Farkas, CFA
Chief Investment Officer