IN THE INVESTMENT world, there’s a lot of nonsense and a lot of hot air. But a few people are like the Shakespeare of personal finance: There’s wisdom in virtually every word. Warren Buffett is probably the dean of this group. But another leading light is Peter Lynch, who in the 1970s and ’80s stewarded Fidelity Investments’ Magellan Fund with enormous success.
Lynch is largely retired today, but his plainspoken advice is as valuable as ever. Below are some ideas he shared in a recent interview published on Fidelity’s website. This advice is especially pertinent today, with the stock market again near record highs. Lynch began with a statement about the importance of mindset:
“In the stock market, the most important organ is the stomach. It’s not the brain… Over the 13 years I ran Magellan, the market went down nine times 10% or more… It’s a question of what’s your tolerance for pain.”
Lynch makes an important point. Over the past decade, the U.S. stock market has mostly just gone higher. While this has been great for investors, it also carries great risk. Recency bias—the mind’s tendency to extrapolate recent experience—can lull us into a false sense of security. To counter this, it’s important to have an appreciation for the entirety of market history—which includes many severe downturns—and plan accordingly. This leads us to Lynch’s next point:
“You’ve got to look in the mirror every day and say: What am I going to do if the market goes down 10%? What do I do if it goes down 20%? Am I going to sell? Am I going to get out? If that’s your answer, you should consider reducing your stock holdings today.”
The S&P 500 currently stands at 2952.01—up sharply from its March 2009 low of 676.53. It isn’t inconceivable that the market might decline 10% or 20%. In fact, it did just that late last year, and the same sort of thing—or worse—could happen any time. That’s why it’s so important to try the thought experiment that Lynch recommends while the market is still high. You’d much rather reduce your stock exposure at today’s peak prices than at a much lower level. Lynch provides a further cautionary note:
“More people have lost money waiting for corrections and anticipating corrections than in the actual corrections. I mean, trying to predict market highs and lows is not productive.”
In simple terms, don’t try to time the market. If you think a portfolio change is warranted, do it today. Don’t wait. Decades of research have shown it’s futile to try to predict where the market is going next. Countless careers and fortunes have been ruined trying—and failing—to predict the market’s next move. All you can do is respond to the facts as they are.
To be clear, I recommend selling only if you see a need to. While there are many reasons you might decide to sell—an upcoming expense, rebalancing or a change in your circumstances or goals—you shouldn’t sell just because you think the market is high. Remember that Alan Greenspan’s famous “irrational exuberance” warning came in 1996. Yes, the market did eventually drop, but the decline didn’t start until early 2000. That’s the risk Lynch is highlighting.
Lynch’s final point: You should be especially wary of making investment decisions based on economic forecasts.
“I think if you spent over 13 minutes a year on economics, you’ve wasted over 10 minutes. I mean, it’s not helpful. Everybody wants to predict the future, and I’ve tried to call the 1-800 psychic hotlines. It hasn’t helped.”
Look no further than the past 12 months to see how right Lynch is about economic forecasts. As you’ll recall, the Federal Reserve had been on a course of raising interest rates. Those moves were largely responsible for the market drop in late 2018. But then, this year, the Fed reversed course and started lowering rates again. This has helped drive the market back up. I know not a single person who predicted this seesaw. John Kenneth Galbraith, a noted economist himself, said it best: “The only function of economic forecasting is to make astrology look respectable.”
Adam M. Grossman’s previous articles include But Will It Work, Staying Positive and Need to Know. Adam is the founder of Mayport Wealth Management, a fixed-fee financial planning firm in Boston. He’s an advocate of evidence-based investing and is on a mission to lower the cost of investment advice for consumers. Follow Adam on Twitter @AdamMGrossman.