Swedroe: Lessons Of 2017, Part 3

January 19, 2018

Now, imagine the nervous investor who sold equities based on views about a Trump presidency. While investors who stayed disciplined have benefited from the rally, those who panicked and sold not only have missed the bull market, but now face the incredibly difficult task of figuring out when it will be once again safe to invest.

Similarly, I know of many investors with Republican leanings who were underinvested once President Obama was elected. And now it’s Democrats who have to face their fears. The December 2016 Spectrem Affluent Investor and Millionaire Confidence surveys provided evidence of how political biases can impact investment decisions.

Prior to the 2016 election, with a victory for Hillary Clinton expected, those identified as Democrats showed higher confidence than those who identified as Republicans or Independents. This completely flipped after the election. Those identified as Democrats registered a confidence reading of -10, while Republicans and Independents showed confidence readings of +9 and +15, respectively.

What’s important to understand is that if you lose confidence and sell, there’s never a green flag that will tell you when it’s safe to get back in. Thus, the strategy most likely to allow you to achieve your goals is to have a plan that anticipates there will be problems, and to not take more risk than you have the ability, willingness and need to assume. Additionally, don’t pay attention to the news if doing so will cause your political beliefs to influence your investment decisions.

Lesson 10: Just because something hasn’t happened doesn’t mean it won’t.

As we entered 2017, with U.S. stock valuations at historically very high levels, many investors were waiting for a market decline before they would buy equities again. Giving them confidence there would be a bear market (a drop of 20% or more), a “correction” (a drop of 10% or more) or at least a dip was that the S&P 500 had never gone a full year in which there wasn’t at least one month with a negative return. The only year that came close was 1995, which saw a drop of just 0.4% in October.

As it turned out, 2017 set a record, with every month showing a gain, extending the index’s record-setting winning streak to 14 months. This provides a good example of why I consider it a rule of prudent investing to never treat the unlikely as impossible or the likely as certain. In case you’re interested, or are one of those investors waiting for that dip, 1995 was followed by another strong year, with the S&P 500 up 23%.

Investors would do well to remember this advice from Peter Lynch: “Far more money has been lost by investors in preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves.”


2018 will surely offer investors more lessons, many of which will be remedial courses. And the market will provide you with opportunities to make investment mistakes. You can avoid making errors by knowing your financial history and having a well-thought-out plan. Reading my book, “Investment Mistakes Even Smart Investors Make and How to Avoid Them,” will help prepare you with the wisdom you need.

Larry Swedroe is the director of research for The BAM Alliance, a community of more than 140 independent registered investment advisors throughout the country.

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