Doing Nothing Can Be a Strategic Response to a Market Crash
In my post of earlier this week, I described the tactical money moves I made in response to the failure of Lehman brothers. This included a strategic decision to stand pat in our retirement portfolio asset allocations.
Since then, the news has remained negative, with the U.S. stock market dropping another 4% on Wednesday and Asian markets continuing to fall as I am writing this. These developments have caused Mr. ToughMoneyLove to question the wisdom of his decision to stay the course. Indeed, am I insanely confident in our so-called “all weather” portfolio?
Rather than ignore my wavering confidence level, I decided to dig deeper into the facts to determine if there were other tactical or strategic options that would be better for our retirement portfolio. Maybe Mr. ToughMoneyLove had to learn some hard truth himself.
What I learned has persuaded me that doing nothing is a legitimate strategy in response to this market crisis.
Even Professional Financial Planners Can’t Agree on What to Do
These are the professionals. A substantial majority of advisers say do nothing. OK, maybe they are overly optimistic so let’s go with what the minority contrarian group is recommending. Except that the contrarians are almost evenly split between increasing and decreasing equity allocations in response to the market crisis.
This tells me that maybe doing nothing is actually doing something – a legitimate strategy. Perhaps I should just close the books on my decision and worry about college football for the rest of the week.
But wait there’s more! (I think Ron Popeil of infomercial fame owns that phrase but I can’t help myself.)
If History Repeats, Doing Nothing Will be a Winning Strategy
I decided to take a look at what happened during and after other famous market crises, three of which I remember. I found historical stock market data for these crises compiled by Ned Davis Research. I then assembled this data into the chart below. From left to right you will see: the market crash of 1929; the “Black Monday” market panic of October 1987; the “Asian Flu” market crash of October 1997; and the post 9/11 market decline of 2001. The market returns are shown during the peak crash periods and at 63 days and 126 days after the crash. As you can see, in each case, the market returned with a vengeance in a few months.
Now Mr. ToughMoneyLove is a logical person and therefore will readily concede that past performance is not necessarily an indicator of future results. (Gosh – where I have seen that language before?) Still, the charted history is compelling. And with a strong majority of professional financial advisers either staying the course or increasing equity holdings, why should I deny history?
So my “do nothing” decision is not founded on mere inertia but on real evidence. I think that makes it a legitimate strategic money move. Don’t you?
What are your money strategies in response to this market crisis?