By Steve Tepper, CFP®, MBA
Market risk isn’t the only risk you face in your financial journey. You could avoid market risk entirely very easily: Stay out of the market. But can you grow your nest egg fast enough to retire when you want to and have enough money to last your lifetime?
If you’re just stashing money in your mattress, you’re going to have an inflation problem. On the other hand, you won’t have any liquidity problems, particularly if you sleep on a waterbed.
If you choose alternative investments, like gold or real estate, you aren’t really out of the market. You’re just in a different market, with just as much, if not more, market risk than a diversified portfolio.
When you exit capital markets, you negate market risk. But the biggest risk you have burdened yourself with is ROMO, or risk of missing out. We have an abundance of empirical and theoretical evidence to support the conclusion that markets will rise over time at a rate well in excess of the inflation rate or the “risk-free” rate of U.S. Treasury notes.
During some periods, markets will fall. Those are great times to not be in the market, of course, but we have no idea when they will occur, how long they will last, or when markets will “hit bottom” before rising again. If you guess wrong on any of those variables, markets could move upward while you’re sitting in cash (which I hope has had a chance to dry out since the waterbed incident). That’s the ROMO.
Yes, markets went down last quarter. And of course we knew they were going to. We knew 100% for certain. And we also knew 100% for certain they were going down in 2016 when Hillary Clinton was about to be elected president. And we knew 100% for certain they were going to go down in 2017after Donald Trump actually was elected president. We knew 100% for certain a bunch of times since 2009.
And we were wrong every other one of those times. Had we acted every time we were 100% certain and moved our money, we would have avoided last quarter’s rout. And missed out on the greatest sustained bull run we’ve seen in our lifetimes. Not a good trade-off.
We don’t know when we will be rewarded for the risk we take by investing in capital markets. And that is precisely why we get rewarded in the first place. It is very likely we will get that reward at very unlikely times—following bad news or during periods of uncertainty. And that’s where we are at now. And that’s why we are staying invested.