A friend admitted that when she was reading the best-selling thriller Gone Girl, there were times when the suspense got too much for her, and she’d flip ahead a few pages in the novel to find out what happened.
We all want to know what the future holds–whether it’s what happens in a gripping novel or what happens in the stock market. When markets were selling off in October, there were times when I wished that I could just look ahead in the ‘story of the market’ to see if the pullback would be short-lived or if it would develop into a more severe decline.
The market is not a book, but it certainly inspires many stories. There’s the story that this is the “new normal” or the “new neutral.” These stories tap into our desire to understand what’s happening in the market, and our belief that if we understand the market, then we’ll know how to invest in it.
But getting too attached to a certain market story can lead to costly mistakes. In the early 2000s tech boom, the dominant narrative was that technology would change the world—and change investing—forever. No area of the market could offer the growth potential of technology. But tech, like all previous leading areas of the market, was in favor until it wasn’t, and investors who stuck with the tech story suffered, while investors who adapted to changing markets were led to buy into leading value stocks and then international stocks.
What if there’s no crystal ball, only great stories?
It’s easy to get caught up in market stories because these narratives are usually logical, and they’re often promoted by smart people who are leaders in their fields, people who we figure must know more than we do. But what if there is no crystal ball, only great stories? What if we truly can’t know the future? How then do we know where to invest?
Some people believe the best solution is to cover all bases and hold growth and value, large- and small-caps and foreign and domestic funds. But with this approach, you are holding losers along with winners, and funds that are out of favor may lag for years.
Others try to time the market in an attempt to participate in up markets and avoid downturns, but as Mark Hulbert told Barron’s, “The knock about market timing is that you have to get out at the right time and then get back in time near the bottom. Even among those few who get out at the right time, they don’t get back in at the right time.”