The Backwards Rebel Yell

The Backwards Rebel Yell

Recently investors have been on a nauseating roller coaster of volatility. Pundits offer explanations as to why and what to do about it. Behind the scenes, investors acting on this advice are abandoning their investment strategy, and partly responsible for these extreme market shifts.

While I wish people didn’t have to experience unpredictable ups and downs, ultimately this is why I have a job: I know how to stomach the ride on a roller coaster going backwards.

Enter “The Backwards Rebel Yell (BRY).” Most coasters are scary but we face forward, able to prepare for the next jolt and approximate when the ride will be over. The old style wooden BRY, however, runs its entire course with the train turned backward.

As the chain tugs the train up the first hill, the riders observe the station they departed. As the train drops over the first crest, accelerating on a seemingly vertical slant, the vista changed to sky. And the riders had no idea what is about to happen next.

As a coaster aficionado, this was one of my favorites. It might explain not only why our company doesn’t bury its head during such turbulence, but prospers through it. Even without knowing the next descent or bone jarring curve, we can explain the most likely outcome: we will wind up at the station— our destination all along. There are only two things that will alter this: a cataclysmic disruption of life as we know it, or we jump off the train.

When I listen to the media gurus it reminds me of the Shakespeare quote from Macbeth, “It is a tale told by an idiot, full of sound and fury, signifying nothing.”

Investors do themselves a favor by ignoring speculation and remaining focused on their investment plan; keeping in mind market volatility is ordinary. Like a backwards roller coaster, we can’t see what’s coming. But if we’ve invested, this is precisely what we bought a ticket for to begin with.

Terrence Odean, an expert on investor behavior said this in regard to the recent market volatility:

"It has been like watching coins get flipped, except each flip as been 5% up or down on the market. The average investor should think about how much damage he could have done to his portfolio going in and out and getting the calls wrong. Sure, there’s a chance you would have gotten them right, but in a market like this one— with everything that is going on out there— do you really want to risk that?"

In other words, acting on a feeling you should be doing something today and perhaps again tomorrow can have the same outcome as fleeing a coaster going 70 miles an hour and then trying to jump on the next train from the same spot you jumped off. Generally speaking, this effort decreases our chance of making back to the station.

So what are some simple rules that an investor can follow in times like this? Wall Street Strategist Bob Farrell summarizes good strategies to follow in roller coaster markets:

1. Markets return to the mean over time.
When stocks go too far in one direction, they tend to come back to their long-term trend— often slingshotting too far in the other direction in the process.

2. The public buys the most at the top and the least at the bottom.
Buying when prices are low and selling when prices are high requires discipline and doing the opposite of what the herd is doing. A time to buy is when others are fearful. A time to sell is when others are complacent. The discipline of rebalancing ensures that you are selling assets high and buying assets low. (Something Wiser investors implement at least 4 times per year).

3. Fear and greed are stronger than long-term resolve.
Investors are their own enemy when allowing emotions to take them off course. A prudent investment plan will withstand market volatility and better ensure our goals are met. If you are feeling unsure, talk with an advisor who adheres to a long term philosophy. He/she will be able to explain how your portfolio is designed to handle times like this.

4. When all the experts and forecast agree— something else is about to happen.
Ignore the talking heads – their guess is as good as yours as to what will happen next. The reasoning (fear/greed) they spew to justify the advice (gambles) they advise sells advertising and creates captivating headlines. If you follow the financial media for any time you may notice: when things are bad it generally predicts worse - and when things are good it generally predicts better. Going against the herd mentality is often more profitable.

5. Bull markets are more fun than bear markets.
No ____ (insert your own word here). Focused investors, however, understand bulls and bears are part of investing. They can no more reliably unwind them than they can separate green Play-Doh into yellow and blue Play-Doh. When the focus is on the future, they understand this strategy is far more likely to yield green Play-Doh down the road. And it is easier and less expensive.

I welcome questions and comments.

Warmly,

Marc Becker

Reference: The article referencing Bob Farrell’s comments can be found at this link.