If you have ever experienced the thrill of waterskiing behind a fast boat, then you may have learned the cardinal rule of the sport, which is keep your head up. If you look down, you will see waves, bumps, the turbulence of the boat’s wake, and impending doom all around you. Keep your eyes down long enough and you will wipe out as the volatility and tumult of all that is going on around your feet will shake your confidence. However, by keeping your head up, and your eyes focused on the horizon, you may have a much more pleasant experience and stay on your skis much longer. The horizon is a much more stable view, and you can ignore the danger and glide through all the chaos that is going on around your skis.
Waterskiing is very similar to long-term wealth management. If you have a comprehensive wealth-management plan, a steady and trusted team, and the ability to focus on the long-term horizon, then your wealth journey will be a much smoother ride, with less heartache and wipeouts. However, by looking down, i.e. watching CNBC all day, buying the latest hot stock tip, fretting every market correction, and giving credence to every pundit who says the end of the world is nigh, we take our eyes off the horizon, and hurt our chances at long-term investment success
Market volatility and drawdowns in the form of a 10 percent correction in the S&P 500 are sometimes overdue and are a normal part of a bull market. Over the past hundred years, we have experienced a 10 percent correction about once a year on average. Bull market corrections are quick, sharp, and may cause a lot of short-term angst. They come out of nowhere with little actual news to base them on, and are usually over quickly. They take out the weak hands in the market, and they remind everyone else that risk still exists. However, bull market corrections are healthy, and they remind investors why their wealth plan is diversified in the first place.
As a long-term investor, you are not “looking down,” and you may not even notice temporary market corrections or extreme periods of market volatility that we endure every so often. With your eyes fixed on the horizon, you can sleep well knowing that short-term shocks and negative news events are not a threat at all to the success of your long-term wealth-management goals.
After the long bull market that we have experienced since the tumult of the 2008-09 financial crisis, investors may consider playing the risky parlor game of trying to sell stocks to cash, and then reinvesting the funds after the hoped for, and inevitable market crash. However, if an investor has a comprehensive wealth plan, a long-term focus, and the courage to stick with the plan through all the ups and downs that come his way, then he does not have to prove how smart he is by trying to time the market. He is already smart.
