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The beauty of doing nothing


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The beauty of doing nothing


I’m not lazy—I just understand the value of doing nothing.

Most human beings aren’t very good at just doing nothing (myself excluded—I’m actually quite good at it), especially when confronted with a challenge. Our brains are hardwired to react: fight or flight! But research suggests that our compulsion to act can become a big problem when it comes to investing.

In today’s note, we’ll explore why it might make sense to do nothing the next time markets get a little scary.

The force is with you. Just like our planet, the global markets have a gravitational force of their own: It’s called “the economy.” Only instead of pulling things back down toward Earth, economic gravity tends to push things up (and to the right) over time. Despite suffering nine recessions in the last 60 years, the U.S. economy tallied 619 months of growth versus only 101 months of contraction. Oh, and the S&P 500 Index returned over +30,000% assuming reinvestment of dividends. Cycles are inevitable, but it has generally paid to respect economic gravity and stick with markets over time.

Timing is really hard. The temptation to sidestep downturns is relatable. The psychological and economic scars from the Tech Bubble and Global Financial Crisis are very real. But there is a large body of research to suggest that investors tend to jump the wrong way at the wrong time when emotions run high. Here are three ways to think about it:

1. Volatility: As normal as rain? People like to complain about the weather in London. It rains a lot. I even looked it up: In the last 30 years, it has rained an average of 106 days per year—or 29% of all days. It rains a lot in the market—I looked that up, too. The S&P 500 has suffered intra-year corrections (declines of 10% or more) in 16 of the last 30 years—or 53% of the time. That’s almost twice as likely as a rainy day in London!

So what am I getting at, here? When I lived in London, I carried an umbrella a lot. Despite the rain, I always made it to work, dinner or the pub. In investing, our portfolios carry umbrellas, too. Bonds, hedge funds and other diversifiers are designed to help weather the storm, and help investors to meet their goals without having to react. 

2. “OMG—You missed the BEST. DAY. EVER!” I never really liked this next chart. It just seemed too hypothetical to me. It shows the impact on an investor from missing some of the best days in the market. I mean, who is really going to miss just the 10 best days? As it turns out, the analysis is not so far-fetched (yes, I like it now). Data on fund flows suggest investors do a lot of selling when markets become volatile (think about the red dots from the prior chart). This is particularly problematic considering that six of the 10 best days, the ones you really don’t want to miss, fell within two weeks of the 10 worst days…just after a lot of money had left the building. Ugh. 

3. I’ll be back. I’ve seen it too often. Markets become volatile and investors “get out.” They tell me they’ll wait for a pullback to get back in. Easier said than done. Consider the period following the Global Financial Crisis. Giving investors the benefit of the doubt, let’s assume they perfectly timed “getting out” at the market’s peak in October 2007. So when did they get back in? The ideal date would have been March 9, 2009—the S&P 500’s GFC low. But remember: The unemployment rate was around 10%, volatility was sky-high, and the Fed was in “break glass in case of emergency” mode. Not exactly confidence-inspiring. Anyway, the chart below shows the sobering reality. Despite stocks returning over 100% from March 2009 to early 2013, bond flows into ETFs and mutual funds outpaced equity flows by 30:1, a trend that’s persisted to today. D’oh! 

It’s all part of the plan. At J.P. Morgan, we practice a goals-based approach to investing. That means we align your investment portfolios with what you want to achieve. We believe this can allow investors to stay invested while avoiding the pitfalls of badly timed, emotionally driven mistakes. The chart below is instructive in understanding this concept.

Each bar shows the range of return outcomes over a different period. We show this for stocks, bonds and a 50/50 blend of the two. Since 1950, the stock market has seen short-term returns vary wildly; one-year trailing stock returns ranged anywhere from +60% to -41% (green, far left). Because of this, a portfolio aligned to a near-term goal (like a down payment on a vacation home, where you can hang out and do nothing) would likely have a low allocation to stocks.

Conversely, a portfolio designed to help achieve a long-term goal, like footing the bill for a newborn’s college costs, retirement, or division among future generations (bars to the far right), might have a higher allocation to stocks.

Taken together, the combination of thoughtful planning, appropriate diversification, and professional active management that can adjust allocations with the evolving cycle, can allow investors to stay the course, even when it’s raining.

Enjoy doing nothing for the rest of the summer. It’s the best…trust me, I’m really good at it.

All market and economic data as of July 2019 and sourced from Bloomberg and FactSet unless otherwise stated.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.

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