Perception

Perception

May 12, 2022

Ostriches don’t actually bury their heads in the sand. They lay their eggs underground, and will occasionally rearrange the eggs with their beak to regulate the temperature of the eggs. The idea that an ostrich buries its head in the sand to hide or ignore its surroundings is actually a common misnomer, and a good thing for the ostrich and the survival of the species.

The same cannot be said of the common investor.

With markets laying a metaphorical egg these last few months, investors are starting to get nervous. Especially for retirees, who are being hit by both equity and bond markets falling simultaneously, this can be cause for concern. The questions and phone calls are starting to trickle in:

“I noticed my account is down quite a bit…should we be doing anything?”

“There has been a lot of red lately in the stock market. What’s happening? Can we do something?”

To be fair, there are some things we can do when the market takes us on a rollercoaster ride. When we start to feel our stomach drop–when prices have fallen considerably–it can be an opportunity. Sometimes rebalancing can be an effective way to “rebound” a little faster. One might almost think of this as the ostrich rearranging its eggs. For those with cash on the sidelines, deploying cash while the market is on “sale” is often helpful too. Continuing to contribute each month into retirement plans or other investment accounts (known as dollar cost averaging) is also an effective strategy when markets are down. Roth conversions may have a place in the discussion too as a way to reduce taxes in the long run.

But in general, the answer to those questions is a little frustrating. Most of the time, we need to sit and wait. Unlike the actual ostrich, we need to put our heads in the sand and just wait it out. Like the bear hibernating in the winter, we close our eyes and trust that spring will come again.

This is not the answer we like to hear. It makes us feel antsy, anxious, restless. Normally the answer to our problems is to do something about them. Fight for our survival, right?

Wrong. Like Ghandi and his hunger strike, the painful solution is less, not more. We must sit for our survival and allow the storm to blow over.

The worst thing we can do is explode into premature action and make a mistake we cannot undo. For those who sell when things are bad, they miss out on the recovery that will pull them back. For those who say “Stop the bleeding! I want out,” they unknowingly take the pressure off the cut on their carotid artery to stop the superficial (but painful) papercut on their finger. The result can be devastating: investors who sell can set themselves back years from retirement, jeopardize their income, and shrink their lifestyle permanently.

It is not easy to be an effective investor–it takes patience and courage and discipline. I will leave you with an interesting idea.

Imagine you invested $10,000 ten years ago in the stock market (let’s use the S&P 500 to represent the stock market). You stuck your head in the metaphorical sand and did not look once at your investment. Ten years later, you resurface and open your investment account. The result? Your investment would have grown 386% as of today to roughly $38,600. That is even with the down market this year.

If you did that–and genuinely never looked once–your experience would be this:

Now imagine another scenario. Imagine you did exactly the same thing, except you looked every single day at your account. You chewed through your fingernails on the downs and reveled jubilantly in the ups. Through sheer force of will, stubbornness, and the beauty of human inertia, you hung on the entire decade as well. Your experience would be this:

 

This looks fairly straightforward at first glance. Focusing on the shorter term, however, you would have noticed in agonizing detail in 2020 that markets plummeted 20% in two months. You would have impatiently complained about how 2014 through 2016 nothing was happening. And most recently, you would be wringing your hands about how rough 2022 is!

The beautiful, elegant, stark truth: in both situations, your money did the exact same thing. The only difference was perception. Yet the first version of you is happy and the second version of you is upset. The first version was blissfully unaware, while the second version of us considered selling a few times and nearly missed out on some incredible growth potential.

Like the metaphorical ostrich in the sand, sometimes we need to be selectively oblivious for our own self-preservation.

If you are struggling to put your head in the sand, we understand: that is why we are here. We will help ensure you remain on the path to success, through good markets, bad markets, and everything in between. The stock market investor dance is typically three steps forward, one step back. Take a deep breath, take another, and give us a call.


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