On Sunday afternoon, with no power in our Toronto home, and a house temperature that was slowly declining toward decidedly uncomfortable, my family ventured out toward Yonge Street on foot. We knew the shops on that end of our neighbourhood had power and we needed to pick up a few things. As we walked, my wife and I explained to our young children how the heavy ice load on the trees caused them to come down, destroying power lines in the process. With so much arboreal carnage on the streets, my youngest daughter turned to me and asked in total seriousness, "Daddy, are we ever going to get our power back?"
It might seem silly to worry if the power is ever going to come back.
But when it comes to the stock market, I find it interesting that so many investors share that same emotional state of mind. As I type this column on the remaining battery power of my MacBook in near-total darkness, staying warm with a gas fireplace, I know it's just a matter of time before Toronto Hydro reconnects us to the power grid. And when the market crashed in 2008, things looked bad too, but long-term investors understood that this was just a market ice storm we'd have to ride out.
I realize the metaphor isn't perfect. We knew about this ice storm ahead of time because of science-based weather forecasts. In the stock market, every expert makes what I consider to be an almost useless short-term prediction. It's too easy to find conflicting forecasts from two different experts.
So what is an investor to do? My advice is to completely ignore the forecasters. Assume we'll deal with the occasional market ice storm and assume that everything will be okay in the end. Realize, too, that storms make us stronger. If you are an investor who regularly saves money with every paycheque, you'll be able to buy more for your money during a market storm. I'm reminded of how often my Strategy Lab index-investing colleague, Andrew Hallam, has expressed his disappointment that the market went up over a period of time. It may seem counterintuitive to tell you that I prefer the market to fall, but that's exactly what I want to have happen before I invest new money.
If you're the type of investor who keeps some of your portfolio in cash, I think it's wise to invest in the market during bad times. By investing regularly over the long run and taking advantage of big market corrections when they happen, you'll make more money than people who think they can predict where the market is going next.
I'm a big advocate of sticking with the stock market over the long run. I stay away from other asset classes because stocks have a history of performing better. That said, this ice storm serves as an excellent reminder that the market can strike you down unexpectedly and quickly. So when thinking about asset allocation, I would avoid investing in the stock market if you need the cash in the next five years. Just as demand for generators and batteries skyrocket in the midst of an ice storm, more people tend to lose their jobs during tough times in the market. The last thing you need is to be forced into liquidating stocks to put food on the table after a market collapse.
In my view, investing is one of the simplest things in the world to do. It does not involve any specials skills or intelligence. It only requires that you pay yourself first (that is, save), do it consistently, keep a cash cushion for when the stormy market weather comes, and if possible, take advantage of market crashes by adding to your portfolio.