We are living in a Harry Truman moment. America’s 33rd president is purported to have pined for a one-handed economist. He complained that "all my economists say ‘on the one hand" only to be followed by "but on the other.” Everywhere around us we are faced with one hand and other hand situations.
There is a shortage of oil on the one hand, but then fear of Covid shutdowns in China causes a big one-day fall in energy stocks. We have too much money due to congressional spending, but we also have too little money because of Federal Reserve (Fed) tightening. Developed economies are reopening amidst the pent-up demands of consumers flush with cash, but we are simultaneously worried that Fed tightening will cause a recession sometime in the future.
Market volatility results from our emotional swings between these opposing narratives. Cognitive dissonance causes us deep anxieties as we try to resolve our discordant impulses. Market volatility confirms how widespread these normal human feelings are. If we get out and the market goes up, we suffer from regret. Fear of missing out (FOMO) makes us buy back in at higher prices. We get caught in the alluring trap of market timing, a completely useless strategy.
For anybody who still feels regret over having missed the gains that “everybody” earned last year, rest at ease. According to the April 27th The Wall Street Journal “on Tuesday, the Nasdaq closed at its lowest level since December 2020.” * You read that right. All of the gains in the large tech index for more than 15 months were an illusion. That is unless you had a strategy to take money off of the table. You had to sell some of your winners too soon.
Since we are all human, the challenge for us is to follow a strategy that forces us to sell high and buy low. This is the same challenge that we face when we go on a diet, adopt an exercise plan, or try to quit an addiction like smoking or drinking. We want to stop our emotional suffering by abandoning the program, telling ourselves that we will get back on track later. The challenge later is always bigger.
In financial planning, we use asset allocation, diversification, and rebalancing (AAD&R) to force us to stick to the plan. This is very difficult to do. We want to sell what is down and buy what is up because it feels good emotionally, at least for a while. Rebalancing, which is nothing more than systematically selling some of what is up to by something that is down, is simple in theory and difficult in practice. Yet, like going to the gym every day or pushing away from the table, it is absolutely necessary if we are going to achieve our goals. What we are buying into may take a long time to go the other way. We may be forced to buy again at an even lower price. We like this when we are buying groceries, but we hate it when we buy investments.
AAD&R has a lot in common with Harry Truman. He is one of our least appreciated presidents, even though he ranks among our greatest. Harry Truman had the guts and the character to make difficult decisions. With the stroke of a pen, he ended the shameful segregation of the military. He had the fortitude to end the war in the Pacific. He exceeded expectations and we can learn a lot from him without the aid of a one-handed economist.