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Markets don't Lose Money-People Lose Money

In today's market, here's an excellent quote, from a very well-respected individual to keep in mind:

"Economy and finance, as instruments, can be used badly when those at the helm are motivated by purely selfish ends. Instruments that are good in themselves can thereby be transformed into harmful ones. But it is man's darkened reason that produces these consequences, not the instrument per se. Therefore it is not the instrument that must be called to account, but individuals, their moral conscience and their personal and social responsibility".

Pope Benedict XVI, in his 144-page encyclical Caritas in Veritate (Charity in Truth), explains how financial markets and the market economy are not fundamentally bad-it's greedy people who mess things up.

Investments are made from companies that strive to generate profits. Over the last decade or so, CEOs with their greed for bonuses, analysts with their greed for bonuses and deals, and investors with their greed for instant wealth have made otherwise good investments look bad. The result was a big drop in the worldwide equity markets. In these times, the same question inevitably comes up:

Volatile markets cause many people to think about changing their approach to investing. They have considered abandoning their long-term strategy to pursue something a little more active.

Some people believe this is a great time to buy equities (stocks) because they think prices are so low. Other people think that if you still own equities, this is the time to sell because values seem so low-and going lower. So who is right? The answer is that no one can really make short-term predictions with any accuracy. In other words, it isn't the markets' fault people lose money, but human emotions.

Some decide based on their assessment of the economy, the political environment, interest rates, and the market. They are often called "fundamentalists", but we refer to them as "skills-based" investors. It takes a special skill to deliver outstanding results on a consistent basis, and few people succeed. Some fundamentalists will make big bets into an asset class in the hope it will follow some pre-determined trend. You might hear about a clever person who made the right call recently, but take it for what it really is-even a broken clock is right twice a day.

Others make their decisions based on predetermined rules; these people are referred to as "technicians". They look at moving day averages, charts, graphs etc. I call these people "rules-based" investors. The benefit of a rules-based approach is that it attempts to keep emotions out of the investing equation. When one line crosses another line, they take action.

It is easier to make investment decisions using a rules-based strategy, i.e., to use technical analysis. Notice we didn't say that the decisions are always better...just easier. The downside to this approach is that it is rigid and may ignore current events-at great expense.

So which approach is better?

In our opinion-neither.

You have to be an extremely talented person to approach the market using a fundamentalist method. And you might have to be crazy to approach the market as a technician.

If your rules-based approach is too broad, you run the risk of staying out of the market too long. If it is to narrow, you'll get jerked in and out of the market. This is not a good approach for long-term wealth creation.

The fundamentalist approach is also flawed. If you don't have the skills now, this is not the time to try to learn them. It would be like trying to learn how to fly once the plane has already taken off the runway.


Then what's left?

Believe it or not, in our opinion the smartest thing for you to do right now maybe nothing. Do not get fancy.

You may be looking for a way to recover the losses you've incurred over the last year, but that could be a mistake. You may be tempted to have someone manage your money who uses one of the two approaches mentioned. You may want to take all your money out of all the investments that have lost money and tuck it away nice and safe, but how would you know when to move back into the markets?

We certainly appreciate that it has been a painful several months for equity investors. We also understand that for many investors the pain is so excruciating that they want instant relief, but we believe this is not the best time to make drastic changes.

If your approach to investing has been long-term, please don't abandon that strategy now. Adhering to your long-term strategy will reduce risk and allow for growth in the coming years. Yes, there can be bad and even terrible years, but if you stick with a defined investment approach with proper rebalancing over your lifetime, you will be reap the rewards.

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