Everything Seems Awful Right Now. Should I Be Investing?

The pandemic seems to be getting worse, not better, despite the appearance of vaccines. Washington is rocked violence and scandal.

The market seems to have shrugged it all off — so far. So should anyone be investing during such turmoil?

The short and simple answer is “yes,” and here’s why.

To bail out on your investments now is essentially saying to yourself that despite all of the terrible headlines and chaos, things will definitely get worse.

But how do you know that?

Of course, it’s also true that staying invested and continuing to invest means you must assume things will get better. That’s equally impossible to predict.

Thus your investor brain hits settles into a stalemate. Things are bad and might get worse. Markets are higher and might go higher still.

Take a time out. Breathe a bit. Now ask yourself, what if you had taken the decision to get out of your investments a year ago? Five years ago?

Would you be in a better place than right now, or worse? Over the long run, the answer is that you would regret missing gains over the years.

Stock market returns over any given short-run timeframe are highly variable. But over five- and 10-year periods it’s very hard to lose money, unless you make some basic investment mistakes which anyone can avoid.

The first mistake is trying to pick winners. Yes, you might buy a hot stock only to see it crater in a month. You also might buy a stock that goes up several times over within a year.

You can’t really know the winner from the loser except in hindsight. The better strategy is to own them both in a broadly diversified mutual fund. Often, the big winners do better than the losers and you come out ahead anyway.

Say you buy that mutual fund. You might get into a mutual fund that gives you negative returns in the coming 12 months, or one that doubles or triples your money.

Like buying single stocks, it’s higher risk to put all your money into a single actively managed mutual fund. Some fund managers will be very right this year and some will be very wrong in terms of their strategy.

Next year, the likelihood is that this year’s geniuses will become the dunces, and vice versa.

The problem, really, is that you pay very high fees for expertise that is vanishingly hard to demonstrate. Even talented fund managers get it wrong, but they still collect their fees

Pressure

Those fees are what cost you the most over years of investing. Investment costs are the anchor that pulls a fund’s return inevitably downward.

The solution is to own the whole stock market at a very low cost using an index fund, and to diversify your portfolio with a mix of asset classes — owning foreign shares, bonds, real estate and more through low-cost index products.

Once you make these two key moves, diversifying and lowering cost, the pressure to “do something” when headlines are bad goes away.

Sure, some stocks will get pummeled based on whichever way the politics goes, but you won’t be overexposed to any given sector or firm.

Yes, some actively managed funds will prosper in the year ahead and some will founder. Your index fund will return what the market returns, minus a very small fee.

Keeping costs low means automatically keeping more of your money invested and growing, year after year. No need to try to figure out how the whole market will react to the historical moment.

Rather, you should care more about five years from today, and while that’s just as unknowable as the market close this week, this month and this year, the data suggests that you will do better than you think so long as you stay the course.

MarketRiders, Inc. is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.