Act, don’t react v.2.0

These events underscore our conviction that the essential challenge to long-term successful equity investing is neither intellectual nor financial, but behavioral; it is how one reacts, or chooses not to react, to market declines that will determine long-term financial success.

Less than 60 days ago, we delivered our end of the year newsletter to our clients and friends. The theme of the message was “Act, don’t react.” I invite you to read it by clicking here. In that communication, we identified ourselves as goal-focused, planning-driven equity investors. We stated our belief that the key to lifetime success in equity investing is to act continuously on a specific, written plan. Conversely, we stated that we believe substandard returns and even investment failure are a result of reacting to (let alone trying to anticipate) current economic/market events.

We are now facing one (or more) of those economic/market events: The situation in the Ukraine, rising interest rates, inflation, energy prices. These all represent the variable du jour. They cannot be timed or forecasted – nor should timing be attempted. The investment policy of a goal-focused, planning-driven, long-term equity investor should be unaffected by it.

At around 4,300, the S&P 500 has experienced a drawdown of approximately 11%. This is called a correction. Corrections are, as you know, a very common occurrence. The average annual drawdown from the peak to a trough in the S&P 500 has for many decades been around 14%. The current decline may ultimately equal that average drawdown. Or it may be more. Or less.

Regarding this correction’s ultimate depth, we can make two important observations: 1) No matter how many talking heads opine in the media, it cannot be predicted. 2) To long-term goal-focused investors like us, it cannot matter.

When we begin working with all our clients, we make a simple statement to everyone. This is an opportune time to repeat it. If you cannot ride out an equity market decline of close to 15% every year – and a decline averaging twice that about every one year in five – you simply cannot be an equity investor.

Furthermore, I encourage those of you still in the accumulation phase of your investing careers to regard downturns as opportunities in that they enable you to accumulate shares at marked-down prices. The media’s “correction” is the accumulator’s “sale.”

Similarly, I remind those of you drawing on your investments in retirement to remember that we are holding cash and short-term reserves to cover your living expenses. I am not suggesting that we are going to need to draw on those reserves; I am suggesting you be comforted once again by the fact that we have them.

Our portfolios are and remain a servant to your financial plan, which in turn was derived from your most cherished financial goals. That progression again is goals – plan – portfolio. You don’t see “current events” anywhere in that progression for a very good reason.

In my experience, all successful long-term investors are continuously acting on a plan. All the failed investors I have ever encountered up close were continually reacting to current events – and always the wrong way.

I invite you to remain with me on the right side of that Great Fact. Of course, I am always here if and when you need me.