Say Uncle!
We don’t know anyone who hasn’t seen the 1983 classic seasonal film,‘A Christmas Story.’It has become a part of the Christmas tradition,as TBS network runs an annual 24-hour marathon of the movie on repeat, beginning on Christmas Eve. In the movie there is a scene in which Scut Farkas, the neighborhood bully, torments Ralphie and his friends. One of the boys (Flick), who did not get away, is tortured into saying “Uncle” which is the equivalent of raising the white flag of surrender.
Similarly, when trying to understand investor risk tolerance, we seek to identify an investor’s point of capitulation, when they would say ‘Uncle,’ and decide to trade their equity investments for the perceived safety of cash or bonds. I bring this up because we don’t define stock market risk as simply falling stock prices. In fact, stock prices fall all the time! Stock market risk occurs when an investor says‘Uncle’ when stock prices fall.It is only when the investor raises the white flag–and liquidates equity holdings in a bear market–that they truly experience risk.You will often hear us reference our favorite investment quote, from Benjamin Graham’s famous book The Intelligent Investor,where he wrote: “The Investor’s chief problem –and even his worst enemy –is likely to be himself.”
Our Philosophy of Investing contains 10 pillars – one of which addresses this risk of bad investor behavior:
It is not easy to keep your composure during market corrections, and the desire to protect your nest egg is intense! Your instincts, and human nature, often overtake rational thoughts. It is natural to feel nervous, and welcome this discussion during volatile times. However, there are tools to help avoid this behavioral risk. For instance, we believe every investor should have a written financial plan in place, AND that if your plan has not changed, then neither should your investment strategy, no matter the market gyrations. We also believe it is beneficial to review your Plan annually to reinforce your commitment to it, in both good times and bad!
Diversification Helps Reduce Bad Behavior
Diversification is another powerful tool that reduces the risk of saying ‘Uncle!’ We take a globally diversified approach to investing, which reduces the possibility of all your assets being down at the same time. For instance, did you know that in one day, this past August, the Argentinean stock market was cut in half? The S&P Merval, which represents Argentina’s stock market, was down 48% in one day, August 12th, 2019. If your portfolio were down this much in one day, would you say ‘Uncle?’
Most people were probably