Swedroe: Wait & You’ll Likely Miss Out

August 23, 2017

“First, while a correction occurring is indeed more likely than not, investors may confuse the chance of a correction from peak-to-trough with the lower chance of a correction from a fixed price level. For example, the historical probability of a 10% correction happening any time during a 3-year window is 88%, significantly higher than the 56% occurrence of that correction from the market level at the start of the period. Second, the cost of waiting and not achieving the correction is a ‘hidden’ opportunity cost, and we humans have a well-documented bias to underweight opportunity costs relative to realized costs. Finally, investors may believe they can wait indefinitely for the correction to happen, but in practice few investors have that sort of staying power.”

Elm repeated the analysis with correction ranges from 1% to 10%, time horizons of one year and five years, and an alternate definition for what makes the market look “expensive” (waiting for a correction from times when the market was at an all-time high at the start of the period).

The firm found that “across all scenarios, there has been a material cost for waiting. The longer the horizon that you’d have been willing to wait for the correction to occur … the higher the average cost.”


Noted author Peter Bernstein provided this insight: “Even the most brilliant of mathematical geniuses will never be able to tell us what the future holds. In the end, what matters is the quality of our decisions in the face of uncertainty.”

And we certainly live in uncertain times. But that’s always the case. To help you stay disciplined, it’s important to keep in mind the market already reflects whatever concerns you may have.

Consider an approach in which you buy, hold and rebalance, because that is what the evidence demonstrates is the most likely way to achieve your goals.

Doing so in the face of so much uncertainty, when stress can lead to panicked selling—let alone not buying with available cash—is what makes being a successful investor so difficult, despite how simple the winning strategy is. The inability to control one’s emotions in the face of uncertainty is why so few investors earn market rates of return and thus fail to achieve their objectives.

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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