24 Mar 2020 money
Over the past week, I’ve seen numerous posts to this effect:
I think the market will continue to drop. Should I sell now and buy back later?
It’s a reasonable question, given recent events. After all, it’s hard to sit by and watch 30% of your portfolio evaporate.
But there’s something wrong with the original assumption. Namely, the market doesn’t obey the laws of classical physics. There is no such thing as market momentum. It moves unpredictably, except to those with insider information. The fact that the market has been down lately tells you exactly zero information about the future, regardless of volatility. It’s impossible to make a rational decision to sell based solely on recent market trends.
Here’s the key insight: the forecast is already included in today’s price - it’s “priced in.” If experts thought the market was going to go down even further, it would already be down. A rational investor will refuse to buy higher, and sell lower, than their predicted future price. The current market reflects everyone’s best guess at the future price, including institutional investors with more resources than the average person. And in case it’s non-obvious, experts domniate the market. They largely control the price of any given stock.
Putting it all together: the price of a stock goes up when experts are happily surprised, and down when they’re disappointed. Unless you can predict when institutional investors will be surprised, don’t try to time the market. Otherwise it’s just gambling. Instead, invest for the long term. Pick a strategy and stick with it, even at times like these.
One final note: I’ve found it helpful to remember that volatility, not overall price, governs opportunity cost. It’s easy to feel bad about missing out on a stock that triples in value overnight. Realizing that you can also make money by correctly guessing a series of rapid price changes, and realizing that it’s the same thing, takes some of the edge off.