Have those words ever crossed your mind? It could be with anything- relationships, career paths, or even the last few months of the market. ‘This time it’s different’ is a framework that we as humans tend to believe when we’re struggling with something and don’t see a way out, but in investing, believing this can be dangerous.
Just like we learned in grade school, history repeats itself. If we look at past market cycles we see periods of growth, like we’ve experienced in the last few years, and periods of decline, most notably the great recession, the housing crisis, and the dot com bubble. But between those periods, we’ve seen many bear markets that have come and gone. Market volatility, although uncomfortable, is a normal part of investing. Not only that, but it’s built into financial plans, it’s talked about even in the longest of bull runs, and it’s something all long-term investors have experienced.
So, how can thinking “This time it’s different” actually hurt you in a volatile cycle?
We hear this a lot, “I just retired, I can’t afford to go through another 2008 again.” It’s different, right? You’re in a different part of life. You remember how tough of a time it was back then and it’s natural to go back to that when things take a turn, but we need to look at the history and the outcome. The fastest way to lose money in a down market is to sell and lock in the losses, this often comes with emotional thinking and quick decision making. Thinking something worse is going to happen this time around can amplify this. That’s why in volatile market conditions it’s best to go back to all the work you did before this: your financial plan. Your plan has market volatility built in, and it can answer many of the questions you might have during this tough time. Should you reallocate or stay the course? What if you need income? Where does that money come from? By completing your financial plan ahead of time, you’ve already answered many of these questions, even if you don’t know it yet! Take some time with your advisor and go through this again, chances are you’ll leave in a much clearer headspace in the long run.
Another time where thinking this time is different is dangerous? Stock picking. Or really picking any asset to go all in on. Not only does this go against the diversified portfolio that us as advisors teach the importance of, but it can lead to a number of biases and ultimately underperformance. Think about it, when the internet came out and AOL was the most popular provider, it would have been nearly impossible to correctly predict that in 20 years AOL wouldn’t be relevant and Google and Apple would take over. The same goes the Lehman Brothers bankruptcy in 2008, and even today with things like cryptocurrency. The truth is we don’t have a crystal ball, and we can’t predict who will be relevant in the future and who will no longer exist. This is why it’s so important to diversify your holdings, pay close attention to your risk tolerance, and continue with the tried-and-true long term investing, rather than trying to get in early on that “Next big stock.”
When it comes to investing, following the fundamentals and sticking to your unique financial plan is often the best to pursue your goals.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.