Should I Stay In or Jump Out of the Markets During Uncertain Times? | Erik Averill, Brandon Averill | AWM Insights #9

Episode Notes

While many states in the U.S. are beginning to relax social distancing practices, the future is still uncertain with some still wondering if there will continue to be drastic market fluctuations. This has sparked many to wonder whether they should stay in the markets at all in the face of potentially more downturns? Why not just return to the markets once they begin to normalize again?

While market fluctuations can certainly be unsettling, trying to jump out of the markets before a potential downturn and then get back in when the markets have normalized has many issues - namely that there is no guarantee that the speculations will end up as predicted.

Taking the most recent example, in March we experienced the fastest bear market in history with stocks falling more than 30%. Later that same month, we experienced the largest three-day surge in the Dow Jones Industrial Average since 1931 followed by the best monthly performance in April for the Dow Jones and S&P 500 since 1987. Had you jumped out of the market at the outset of the downturn, you may have missed out on the potential market recovery that occurred directly after.

In this week's episode, Brandon & Erik discuss these questions and give some insight on a better approach that focuses more on long-term wealth creation rather than short-term gains.

+ Read the Transcript

Erik Averill (00:00):
Hey everyone. Welcome back to another episode of AWM insights. I'm your host, Erik Averill and I am joined by Brandon, my co founder and business partner. And today we're excited to jump into a question that is I think looming in so many people's minds. And that is as the stay at home orders are reduced and we report returned back to a little level of normalcy. There's also the fear of, of what happens if we happen to see a second wave of Covin 19. The CDC has warned us that potentially if we saw this second wave during flu season that it could be more troubling than our current cycle. And then Dr. Anthony Fowchee has called the potential for a second wave, highly likely. And so Brandon, the questions so many are asking is, is that if we, if we're predicting that the worst is to come, why should I stay invested in the markets or if I'm sitting on the sidelines, why shouldn't I just wait until the economy normalizes to jump back in? What advice do you have for our listeners?

Brandon Averill (01:09):
Yeah, Erik, fantastic questions. As you mentioned, we're definitely getting a lot of them right now, but I think this all goes back to the belief that prices are fairly reflected or completely reflected in the markets. And so, you know, what we believe is that the collective certainly has a better a sense, a better idea than any one individual on what's going to happen in the future. And so if we're looking ahead and we're all as a collective concerned about the fact that there may be a second wave that it may have further impacts on our economy. You know, what the market is most likely doing is it's pricing all of those assumptions in. So to try to predict that we're going to have a decline in the financial markets because of this consensus second wave that is coming, you know, the, the evidence just doesn't support it.

Brandon Averill (02:00):
And I think a great example of this is back to the 2016 election when it was pretty much everybody was expecting Hillary Clinton to come out. You know, triumphant in that presidential election. Donald Trump was certainly the underdog. And sure, that was one decision. There were, there were obviously a lot of Trump supporters, a lot of people that elected him. So, you know, at the end of the day, if you got that decision right, that would've been kudos to you, but you wouldn't you wouldn't have been at least the consensus. But really what follows is what you have to get correct as well. And that's the reaction of the market to the event, to your prediction. And I would say overwhelmingly at that time, if we go back, anybody that believed that Donald Trump had the potential or was going to be elected thought, Hey, if this happens, the financial markets are gonna go, you know, they're going to plumb it.

Brandon Averill (02:51):
It's going to be horrible. We actually saw that on election night. It started to play out. We had markets hugely volatile down to the downside. But then what was followed was obviously one of the better, biggest bull markets that we've had in decades. And so you had to get to two predictions, right? You had to predict Trump winning the election. Then you had to predict the markets would react positively to that. Those are very, very difficult and I would argue impossible to have done. And we just see from our recent experience with March and April how hard it is to time things. I mean a March, we experienced the fastest bear market ever as stocks fell in the U S by more than 30% it was a wild month. And we experienced also experienced the largest three-day surge in the Dow Jones industrial average since 1931 so you know, we had that and then you follow up that crazy March with April where we saw, you know, both the SMP 500 and the Dow have their best monthly performance, 1987 so if anybody out there can predict those two events, I'd love to meet you.

Brandon Averill (03:57):
You know, it just seems like a something that not many people can do. And in the short term, it's why we don't try to do that. We believe in the capital markets and I don't think you can reasonably predict any of this. Figure out when to get in and when to get out. We know time in the market is what matters.

Erik Averill (04:15):
So helpful Brandon and I and I think it's true, right? Like how stressful and how much anxiety you must have trying to time the markets if you think that that's the game to be played. I mean 26 million people have filed the unemployment and for you to say that we, we just experienced one of the best months in recent history is just mind boggling. So you know, for our listeners the, what we want to communicate is you don't need to add stress by trying to time the markets to have a positive investment experience. We know that capital markets reward investors who take a longterm perspective and that remain discipline in the face of these kind of short term fluctuations. And so what we say every single week we want to return to once again is control what you can control. It's about having an appropriate asset allocation.

Erik Averill (05:10):
It's about diversification and it's about controlling expenses like turnover and then especially taxes for our listeners that are in the highest tax bracket. And if you do those things, you are going to be better positioned to capture the potential rewards of the capital markets. And I'd leave you with this, that ultimately at the end of the day it's, it's coming back to what is your goal as an investor? Is it just short term wins or is it Wong term multigenerational wealth? And so professor Jeremy Siegel leaves us with this quote that I think is so helpful and it says that the short term fluctuations in the market which looms so large to investors actually have very little to do with longterm accumulation of wealth. And so listeners, we appreciate your guys's attention. We'd love to hear from you. If there's topics that you'd like to us to cover in the future, please ping us. And until that time, stay humble, stay hungry, and be a pro.

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