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Expert Analysis and Commentary
Larry Swedroe Aug 24, 2016
In addition to these words of caution, Buffett recommends that if you simply cannot resist the temptation to time the market, then you “should try to be fearful when others are greedy and greedy only when others are fearful.”
The following data on the intra-year declines of the S&P 500 Index should convince you of the prudence in Buffett’s advice.
Thanks to analysis from my colleague Dan Campbell, part of the investment strategy team at Buckingham, and The BAM ALLIANCE, we can also take a look at some longer-term data. Dan examined how the S&P 500 Index performed following a poor start to the year. The data covers the 90-year period from 1926 through 2015.
We’ll take one more look through the data, this time focusing on the S&P 500 Index’s worst performance over calendar quarters. The period we will examine is from 1980 through 2015. There are 144 quarters during this timeframe.
I would add that in the first quarter of 2016, the S&P 500 Index lost more than 6%, providing investors with one more test of their discipline. How the full year turns out remains to be seen.
This data makes clear that markets are highly volatile and that significant losses are a regular occurrence. Thus, your investment plan must incorporate the virtual certainty that your discipline will be tested over and over again.
The reason that successful investing remains so hard is that it can be difficult for many individuals to control their emotions — greed and envy in bull markets and fear and panic in bear markets. In fact, I’ve come to believe that bear markets are the mechanism by which assets are transferred from those with weak stomachs and no investment plan to those with a well-thought-out plan (meaning they anticipate bear markets) and the discipline to follow it.
A necessary condition for staying disciplined is to have a plan to which you can adhere. But that’s not enough. The sufficient condition is that you must be sure your plan avoids taking more risk than you have the ability, willingness, and need to assume. If you exceed any of those, you just might find your stomach taking over. The bottom line: If you do not have a plan, develop one. If you do have a plan, and it’s well-thought-out, stick to it.
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