Retirement: This Time Is Different

May 15, 2020 8:02 AM ET62 Comments

Summary

Investors always are tempted to sell everything in a bear market to avoid the emotional pain of seeing unrealized losses.
Unfortunately, this never works out well, especially for retirees.
This time may be different, but the end result will be the same. Patience and courage will reward investors who stay on course.
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The four most dangerous words in investing are: This time is different.

It's a statement on our tendency to believe that we won't make the same mistake twice. We believe that what's happening today is completely different from the past, and therefore, we should sell our stocks before they drop even more. The old rules do not apply anymore!

In reality, this rationalization process happens in every crisis. People become scared, they start overthinking, and quickly come to realization that now is time to get out of the market before it is too late.

Consider the example of John, Earl and Tom:

The year was 1940. John Canterbury had $10,000 invested in the stock market. He thought to himself, "We are in the middle of World War II. I better start learning German. This time is different. The markets are dangerous." John took the money in cash and buried it in his backyard. Ten years later in 1950, his $10,000, had he had kept it in the stock market, was worth $35,035.

The year was 1950. Earl Pickett had $10,000 invested in the stock market. He thought to himself, "The Communists have infiltrated our government. I'm pretty sure my neighbor Bob is a Commie. This time is different. The markets are dangerous." Earl took the money in cash and buried in it his back yard. Ten years later in 1960, his $10,000, had he had kept it in the stock market, was worth $44,694.

The year was 1980. Tom Chadwick had $10,000 invested in the stock market. He thought to himself, "The Cold War menace is looming. Nuclear tensions are at an all-time high. Russian paratroopers could descend from the skies at any time. This time is different. The markets are dangerous."Tom took the money in cash and buried it in his backyard. Ten years later in 1990, his $10,000, had he had kept it in the stock market, was worth $36,813. - Source

Fast forward to 2020, and investors are again saying the same four words: This time is different. They are selling their stocks. Getting out of the market. And claiming that this unprecedented crisis will surely get much worse.

This behavior comes from a good place. But unfortunately, it causes much more harm than good to investors, and that's especially true for retirees who cannot afford to make these mistakes.

In this article, we will do our best to steer you away from those thoughts. This time is not different. Now is not time to panic and sell. Sooner or later, the market will recover again and those who remained consistent with their approach will profit while those panicked will suffer the consequences.

You Cannot Time the Market

First off, we should make it clear that it's not possible for you to time the market. Professionals cannot do it. So to think you can is just not rational.

The average performance of individual investors has historically been 2.3% per year because of their failed attempts at jumping in and out of the market. Had they simply help on and waited patiently, they would have earned the triple of that with an S&P 500 ETF (SPY). And even better, if they invested in REITs (VNQ, IYR), they would have earned nearly 10% per year while cashing in high dividends:

"Investors should understand that they probably won't be able to move in and out of things. In order to be successful at timing in the market, it is more difficult than getting a gold medal in the Olympics. You would not think of competing in the Olympics, but everybody thinks they can compete in the market. But there is so much money competing, it is like a zero sum game and the worse thing you could do is think that you can time all of these movements." - Ray Dalio

This is a Serious But Temporary Crisis

The recent bear market is the result of a pandemic that's forcing people to stay at home and businesses to shut down. It's a very serious crisis.

However, before you panic at the high unemployment rate and collapse in GDP, you must keep in mind that this is only temporary. It's not caused by a free market economy. It's caused by government mandated measures to slow down the spread of the virus. We have essentially put the economic engine on pause.

Yes, it's painful right now, but it is only a temporary solution. Sooner or later, we will reopen the economy. The unemployed will gradually return to work, and before you know it, we will have put this crisis behind us.

Source

I cannot tell you when exactly that will happen, and it will surely be a gradual process. Many Asian and European economies also are further in this process and show encouraging results.

People adhere to social distancing guidelines and use masks. Some anti-viral drugs already are in use. Better ones are in development. And a vaccine could be ready as early as Fall 2020, according to Pfizer (PFE). In the meantime, governments around the world are pumping an enormous amount of stimulus into the system to mitigate the near-term damage.

Never Bet Against America

The market has crashed time and time again. This is nothing new. However, the market also has always recovered and resumed its long-term trajectory:

Source: Berkshire Hathaway

"In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497." - Warren Buffett

Right now, you may think that going into cash is the safest option. In reality, it is very dangerous, especially for a retiree.

If you sell today, and miss the recovery, you essentially booked your loss and must now deal with the consequences of that decision for the rest of your retirement. You are not working anymore and it's much more difficult for you to recover from this.

However, if you simply hold on to a diversified portfolio of well-selected investments, you are very likely to see a full recovery sooner or later. In the meantime, you are hopefully earning high dividends to live off.

Bottom Line: This Time Is Not Different

Don't do anything stupid. Selling into a crash has historically destroyed an enormous amount of wealth for retirees.

You cannot time the market. You won't pick a bottom. And you will risk missing the recovery. Note that the bulk of investment returns are earned in a few strong days. You won't know when they come, and if you go to cash, you will be leaving a lot of money on the table.

Why should I stay invested? - J.P. Morgan Asset Management

Source

Holding cash and missing out on the recovery is far more dangerous than being invested, in our opinion.

With well-selected income investments that are backed by real assets, retirees can today generate 6-8% sustainable yields and do not have to worry about volatility. At High Yield Landlord, we believe that a lot of REITs, MLPs and preferred shares provide exceptional, once-in-a-decade opportunities to earn high income and upside in the anticipated recovery.

We have been steadily buying over the past weeks and we think that you should too. This time is not different. The market will recover and just make sure that you are not left behind.

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