Tom Bradley is co-founder of Steadyhand Investment Management, a member of the Investment Hall of Fame and a champion of timeless investment principles.
In these uncertain and highly emotional times, investors are wondering what to do. My answer will likely leave them unsatisfied and ensure that I won’t be asked to do any media interviews.
My suggestion is to do nothing.
There are two main reasons for such a radical recommendation. One is the value and importance of your investment plan, and the other is the lack of quality information on which to base decisions.
I’ll start with the plan, which is a qualifier for this strategy. Doing nothing is appropriate for investors who have a plan and have built their portfolio around a target asset mix.
An investment plan is designed for times like this. It requires that you hold a mix of asset types, industries, geographies and currencies. It assumes there will be both no-holds-barred good times and head-scratching bad times.
A proper plan anticipates that your riskiest investments will go down sometimes, maybe even a lot, when the news is dire, a recession is probable, earnings estimates are being slashed and investors are running for cover. But most importantly, a plan ensures you’ll fully recover from any downturns.
I’ve portrayed your plan as all-knowing, but sticking to it can be difficult, especially when you trust it the least – when your portfolio is well down from its high, and everyone in your investment ecosystem is telling you to do something different.
Which brings me to the other reason for doing nothing.
In turbulent times like we’re going through, the flow of information is plentiful, but the quality is questionable. Let me explain.
When patterns are disrupted and previously unknown factors take over, commentaries are reactive, not analytical. They can’t help but be. Changes are happening in real time, and clients want to know what to do – now! There’s little time for thought, let alone sober second thought.
Advice for a young investor: Eat your broccoli, kid
What clients want is unachievable. They want to know the unknowable, preferably delivered in a confident voice. Unfortunately, many advisers will deliver a decisive strategy – sometimes naively, other times knowing it’s a shot in the dark. Could the economy grind to a halt? Could inflation prove to be a bigger problem? Could tariffs be gone by the time the strategy is implemented? Who can be confident enough to bet on any of these things?
The information flow also has an obvious bias. It’s overwhelmingly negative, even though the balance between positive and negative long-term market forces may have changed very little or perhaps not at all. Opportunities get buried away under a pile of risks.
Right now, little is being made of how adaptable the economy is (proven time and again) and the new economic alliances being formed. Nor is any attention being paid to the potential winners – strong, nimble companies that will come out the other side more dominant than ever. Or the fact that speculative behaviour, which is a millstone on future returns, is being washed out of the system.
Speaking of return expectations, in-crisis forecasts invariably project lower returns going forward, at a time when reduced price levels are setting the table for a period of above-average returns.
And one more. In times of crisis, everyone becomes an economist, which leads to an assumption that investment portfolios won’t recover until there’s good economic news. This in the face of overwhelming evidence that stocks can recover dramatically with no good news, just less bad news. Or, as was the case this past week, a reprieve from the irritant.
You get the point. In difficult times, there’s too little insight. Too much unwarranted confidence. An unhealthy need for certainty. And a natural desire to do something – or at least be seen to be doing something.
The late Peter Bernstein said it best: “In calmer moments, investors recognize their inability to know what the future holds. In moments of extreme panic or enthusiasm, however, they become remarkably bold in their predictions.”
So, what does doing nothing mean? It’s doing the little things you always do. Making regular contributions. Using inflows and outflows to rebalance to your target asset mix. Basing your expectations on potential returns, not recent returns. If you are prone to making tactical moves (not recommended), be defensive (or offensive) when others are greedy (fearful). And trust your plan, not people who confidently predict otherwise.