But for kitchen-table investors, the best advice is not to flee to safety. It is not to sell stocks and buy bonds. It is not to move into cash and gold, or to think about alternatives such as cryptocurrencies. It is not to hedge with health-care stocks, or to try to dump Chinese and Italian investments, or to short the American fracking business, or to buy the dip. It is to do nothing.
The simple, fundamental principle of investing holds that you should buy low and sell high. It makes intuitive sense to sell when stocks are dropping and to buy when things are turning around. The market is panicking and plummeting now as the horror of COVID-19 is taking hold. It might crash harder as the mortality count gets worse and governments enact strict measures to contain the virus. Or it might rebound as countries get the worst of the epidemic behind them and financial regulators take action.
Which one? Nobody knows. That is the whole point: Timing the market is a game for professionals, not amateurs. And most professionals are terrible at it too. Study after study has shown that “active” investors, meaning ones who shuffle investments around to take advantage of new information and supposed opportunities, tend to do worse than “passive” investors, meaning ones who buy the broad market and walk away. One Morningstar analysis found that just one in four active funds beat the average returns provided by passive funds over a decade-long period, and that cheap-and-dumb funds were twice as successful as expensive-and-smart ones. And study after study has shown that the old investment chestnut is correct: Time in the market beats timing the market.
Say you were to sell your equities today, and to hold cash or bonds as the market plummeted. What are the chances you would be selling at the nadir? How would you know when the equities market had hit bottom? Would you be able to act fast enough if there were a muscular policy response and a surprise rebound? How much of a surge would you be willing to miss out on to make sure that you were not catching a dead-cat bounce? Even if you got out of the market at the right time, you would probably struggle to get back in at the right time. Trading during a time of extreme volatility means knowing when to buy in as well as when to cash out.
Investing on a longer time horizon means not worrying about buying dips and selling highs. And studies demonstrate that buying and holding assets for the long term is a great strategy for average folks saving for retirement, and for everybody: rich, poor, old, young, risk-averse, and risk-hungry. In one 10-year analysis, hedge funds—highly sophisticated investment instruments available only to the richest of the rich—returned a quarter of what plain-vanilla, market-tracking index funds did.
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