The Superbowl has past but March Madness is coming and one similarity is that billions of dollars that will be bet on the outcome by millions of people. Las Vegas puts odds on it. Countless radio and TV commentators, past players and coaches, even some psychics will be predicting what they think might happen and who will win. On the one hand, we may choose to listen, because we like sports or are rooting for one of those teams, and we may choose to agree with some of the commentary, if they happen to agree with us. But in our heart of hearts, we all know one thing, it is that no one knows, really knows what is going to happen.
So we might not put these so called sports experts on any kind of pedestal but when it comes to the stock market, it seems these same kind of experts are given more weight. Here they are making the same kind of predictions about the future, with all kinds of solemn, all knowing tones, when they likely have no better a crystal ball about predicting the future of the market than predicting the Super Bowl or the NCAA basketball champion. No matter what the numbers or the models might say, it has been shown time and time again that the future is a mystery to us all.
It seems to be human nature to attach all kinds of importance to seemingly random events and it is the same in most predictions about the future. We tend to listen to predictions about the sports contests, or the economy because we want certainty in an uncertain world. Should we invest? Should we sell? What might this event or policy really mean? No one really knows and if one needs any proof, it was not too long ago the whole world shut down and yet in 2020 the stock market actually was up approximately 18% when many sold their stocks based on attaching a market prediction to a terrible event.
The point is that the stock market does not have to be a prediction game. In fact, all this noise about predictions distracts us from what we should be focusing on and that is using our own common sense. Different than sports in general, the market does not have a time limit. It goes on and on, which is a real advantage, if we use it. We can be patient. We can be wrong in the short run but if we are patient the market can make us right in the long run.
Over the long term, the market allows for correction and can be very forgiving. So, if we sell a little too early, it’s okay, eventually prices will decline and we can get back in. Right now the market is down, and if we buy now we might have some scary times ahead, but if we can ignore the noise and just simply sit and wait, eventually prices can come our way.
I have found the best strategy for most people is to just pick the level of exposure to stocks that we are comfortable with and establish this as our baseline or target. How do we pick this level? Some will do it based on age or a long term target, but for me, I like basing it on a quote from a great trader, Jesse Livermore, who over 100 years ago suggested to take stocks down to your sleeping level. In other words, make sure stocks can be at a level that won’t panic you or wake you up in the middle of the night if they are in a correction. Panic or worries tend to encourage us to sell at the bottom when we should be looking to buy. And the best way to not panic is to not have lost too much when stocks do come down, which is inevitable! For some that might mean 70% in stocks, for others, 50% or lower. Each of us must find our own risk tolerance (or our own sleeping level) and then stick to it, despite the constant chatter from so called experts, bragging friends, neighbors or social media.
Once we pick our target, then how do we manage our money from there? This is an example of a strategy that I like to follow. When the market has rallied to higher levels our exposure to stocks naturally rises. Then it makes sense to cut back to our target. Or if the market declines and our exposure dips below our target we can add back in. For example, in this strategy, if your target to stocks is 50% and the market rallies so it becomes 55%, then you might cut back to 50%. Or vice versa, if the market falls to 45% you might increase back to 50%. Some may widen this range but either way, this discipline forces us to do the obvious, “buy low and sell high.”
This simple concept seems to get forgotten with all the daily chatter that goes on. If you enjoy the chatter, that’s okay, it can be entertaining, just like it might be fun to hear what the so called experts think about your favorite team, but regarding the market, just don’t let them sway you from common sense!