Staying the Course
Staying the Course
Adam M. Grossman Jun 18, 2023
WHAT DO WALL STREET analysts, magazine editors, economists and academics have in common? They’ve all found it virtually impossible to make accurate market forecasts. That’s why Vanguard Group founder Jack Bogle gave this advice to investors: When markets go haywire, “Don’t do something. Just stand there.”
Warren Buffett has given the same advice. In 2008, here’s how he explained it: “In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”
In the years since, we’ve endured additional political turmoil, another pandemic and another recession, and yet the Dow Jones Industrial Average now stands at 34,000.
The “just stand there” approach is supported by years of data. Study after study has found that investors do better, on average, when they avoid reacting to their investments’ periodic ups and downs, and instead just stand there. I share that view, but this is sometimes easier said than done.
That’s because—despite all the data—it just doesn’t feel like a satisfying strategy to submit to the whims of the market. What can you do to square that circle? Below are some suggestions.
Permanence. Technology commentator Tom Goodwin has pointed out how difficult it is to make predictions in the business world. Consider the music industry. After suffering a nearly 50% revenue decline due to the introduction of online music streaming, the industry defied expectations and bounced back. Revenue is now at an all-time high.
The newspaper industry appeared to be in a similarly tough spot after the internet made lots of news available for free online. Many newspapers did indeed fail. But some found new ways to make money. The New York Times, for example, is seeing revenue hit new records after several difficult years.
The lesson: Prognosticators don’t know the future. They don’t know which way industries, companies or individual stocks are going. But that, in a way, is a good thing. It means you can safely tune out these folks and avoid reacting to their (flawed) predictions.
Resilience. As I’ve noted before, we shouldn’t expect stocks to rise in the future simply because they’ve always risen in the past. Rather, we should expect stocks to rise because share prices, more or less, follow corporate profits.
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