Many investors are responding to the current environment in counterproductive ways—here’s my “rational” argument for sticking with a disciplined approach

By Patrick Kujawa, AIF®, Regional Director

December 31, 2020 might be the most anticipated New Year’s Eve in world history. How many of us have experienced more stress and anxiety than in any other year in our lives? Quite a few, I’d wager. And that presents a BIG problem when it comes to being a successful long-term investor. Why? Because we’re human. There’s an old saying that human emotion has destroyed more wealth than any bear market in history.

My colleagues and I have the opportunity to talk with many prospective clients who are managing their own portfolios. Given the recent market volatility and stress of 2020, it’s not surprising that many investors are no longer comfortable with this.  I’m going to highlight some common errors we see individual investors making, address the current investment landscape and discuss a potential solution to help investors develop a disciplined, long-term investment strategy that hopefully enhances their chances for success.

What we’re seeing: Common errors during crazy times 

Right now, some investors have portfolios that are too aggressively postured, especially those who are approaching or in retirement. Returns are rarely symmetrical: If an investor starts with one dollar and loses 50% in a down market to arrive at 50 cents, they now have to make 100% to get back to even par. So, it’s generally preferable to have a well-diversified portfolio that seeks to generate good returns when the market is positive, but is engineered to better protect capital when the occasional market storm comes.  But this must be done in advance, for as the Biblical story of Noah teaches us, it’s better to build the Ark before the rain starts.

Investors need to have their portfolios be correctly allocated depending on where they are in life, not based on their age and the outcome of a risk tolerance questionnaire—or their desire to rake in excessively large returns. We are firm believers in what we call LifePhase InvestingTM.

Other individual investors are attempting to time the market, even though history tells us this is extremely difficult to do. In order to time the market successfully, one has to make several correct decisions, including when to exit the market at the peak and when to get back in at the bottom. It’s been my experience that many people have no discernable decision-making process for buying at attractive levels.

The great investors, such as Warren Buffett, profess to like buying when there is “blood running in the streets,” but most individual investors tend to be overcome by fear when markets drop. They generally wait until markets have significantly recovered and buy back in at higher prices.

At Halbert Hargrove, we seek to take advantage of the proverbial lemons that bad markets give us and make lemonade by rebalancing portfolios and actively harvesting losses. These are strategies that we believe can significantly help our clients’ long-term, after-tax results— but they’re different than trying to time the market.

Many investors have the false belief that every time they hear “The market is at an all-time high” they should take money off the table and wait for a downturn to reinvest that money. If markets generally trend upwards, I would strongly argue that it’s time in the market, not timing the market that’s important. Investors are now being told that the U.S. stock market is a bit on the expensive side as defined by P/E ratios. This might be true, but slightly expensive markets do NOT mean that a crash is imminent, but rather, future expected returns should be a bit muted. Some investors constantly seek the “perfect” time to invest, when they should acknowledge that the probability of finding that perfect time is a fool’s quest.

In general, many individuals lack perspective and knowledge of how successful investing works. Over the past 90 years, the U.S. stock market has had positive returns approximately 69% of the time[i] —and the average annual return has been approximately +9.75%[ii].

The current investment landscape

Going into 2020, the U.S. economy was humming, with historically low unemployment, a very strong stock market, appreciating real estate prices, etc. Then the Global Pandemic hit. In March, awareness of the virus grew in the U.S. and the government shut down our economy. This led to the fastest 30% decline by the S&P 500 in history. It dropped about 36% from February 20-March 23.[iii] Unemployment spiked at the same time as fears about catching COVID-19 grew. Understandably, people were scared.

What did investors do? From January 1st through September 30, 2020, they have withdrawn $165 billion from US equity funds and ETFs and added +$214 billion into US taxable bond funds.[iv]

Was this smart? In March, the U.S. Congress and Federal Reserve injected trillions of dollars into the hands of U.S. individuals and businesses, both through fiscal relief packages and by cutting interest rates to near zero, trying to buoy the economy until the global scientific and medical community could get their arms around the coronavirus. The global stock market experienced a massive rally from April through July, with the S&P 500 returning approximately +48% from March 20-September 2, and, at the time of writing, is approximately +10% for 2020.[v]

Yet many investors are still somewhat paralyzed about the future. They have allowed their emotions to prompt them to push the “pause” button. They say they are worried about the markets, the economy, their health, etc.

Wise? Well, in a nutshell, NO! Let’s use history as a guide for a prudent investment strategy. Unlike individuals who easily fall prey to the Extrapolation Bias, believing events of the recent past will persist into the future, markets tend to look forward.  As a former colleague of mine constantly reminded us, “you cannot get last year’s return when you buy a stock, you are making a bet on the future.”

Since 1929, there have been 13 major U.S. equity market corrections, averaging -42% returns and lasting 22 months on average.[vi] But historically, after suffering pain, the markets then rebounded bullishly, averaging +166% returns over an average period of 54 months.[vii] Are we saying there will be a raging bull market over the next several years? No. U.S. stocks are slightly expensive from a historic standpoint, but not overly so. Many strategists argue that near-zero interest rates historically have justified slightly elevated stock market valuations. Higher valuations don’t presage negative returns—historically, subsequent near-term returns simply tend to be muted compared to historic averages.

While the forecasts vary depending a bit from firm to firm, the average expected 10-year average annual return for US Large Cap stocks, based on data from five different firms, is approximately +5.4 % / year.[viii] Not bad but definitely below the past decade. But very likely above the rate of inflation. Second, for those investors who are still scared, what are their choices? If they put their money into bonds or cash, it’s very likely that they are dooming themselves to trailing the rate of inflation over time. Given historically low interest rates, the current 10-year forecasted average annual returns for the US bond market, based on data from five different firms, is approximately +1.7%/year[ix], not so good. As investors, it’s crucial to continually compound your wealth so that you outpace inflation and improve your purchasing power over time.

According to JPMorgan Asset Management, from 1950-2019, there has never been a 5-year or 10-year rolling period where average annual returns for a 50% stock/50% bond portfolio has been negative.[x] And the average annual return for the 50/50 portfolio from 1950-2019 has been approximately 8.9% per year.[xi]

Many people have been worried about the recent U.S. elections and the possible effect on the markets.  While there are still a few votes to be counted, primarily in the January 2021 Senate elections in Georgia, it appears that we will have at least two years of divided government with Republicans and Democrats needing to share power.  Historically, what has divided government meant for investors?  Since 1947, we’ve experienced divided government 62% of the time, with average annual returns of +7.8% per year for the S&P 500 during that backdrop.[xii] It’s not illogical that Republicans and Democrats in Washington, DC will be forced to work together in order to pass further relief packages that aid small businesses and individuals until the economy can return “back to normal.”  Globally, drug companies appear to be close to finalizing testing on vaccines and new therapeutic drugs that improve people’s chances of avoiding COVID-19 or surviving if they catch.  We’ve been through a very tough year, but the light at the end of the tunnel keeps getting brighter.

How a trusted wealth advisor can add value

Given that individual investors are highly susceptible to allowing their emotions to override their rational decision-making process, it’s worthwhile to explore hiring a staunch fiduciary wealth advisor they can trust. They can undergo a rigorous discovery process that should strive to explore their entire situation. Next is to conduct thoughtful analysis that takes the client’s entire situation into account and develop a plan, stress tested to withstand many possible market outcomes, that clients can adhere to through both strong and declining markets.

When storm clouds gather and clients don’t want to be in any position except the fetal one, a good advisor can impart discipline and keep clients from hurting themselves. Studies have surmised that “Behavioral Coaching” may add 1-2% in net return.[xiii] So if a good wealth advisor can work with clients to develop a disciplined plan, stick to that plan come “heck or high water” and prevent clients from hurting themselves by doing the wrong thing at the wrong time, there appears to be significant added value.

Sitting on the sidelines might make you feel good, but I’m pretty sure that you’ll feel lousy when the “two lines cross” and you start losing out to inflation. So do your homework, find a fiduciary wealth advisor you can trust, develop a plan, and get off the sidelines and start investing for your future.

How do you balance having the life you want to enjoy today with what you’re going to need in the future? Are you doing what it takes to enter your dream retirement? TAKE OUR QUIZ to find out.


The views contained herein are not to be taken as an advice or recommendation to buy or sell any investment. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without previous notice. This material should not be relied upon by you in evaluating the merits of investing in any securities or products mentioned herein. In addition, the Investor should make an independent assessment of the legal, regulatory, tax, credit, and accounting and determine, together with their own professional advisers if any of the investments mentioned herein are suitable to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment.





[iv] JP Morgan Asset Management, Guide to the Markets U.S. 4Q 2020 As of September 30, 2020 – page 70


[vi] JP Morgan Asset Management, Guide to the Markets U.S. 4Q 2020 As of September 30, 2020 – page 19

[vii] JP Morgan Asset Management, Guide to the Markets U.S. 4Q 2020 As of September 30, 2020 – page 19

[viii] Sources consulted:;;;;

[ix] Sources consulted:;;;;

[x] JP Morgan Asset Management, Guide to the Markets U.S. 4Q 2020 As of September 30, 2020 – page 71

[xi] JP Morgan Asset Management, Guide to the Markets U.S. 4Q 2020 As of September 30, 2020 – page 71

[xii] JP Morgan Asset Management, Guide to the Markets U.S. 4Q 2020 As of September 30, 2020 – page 37

[xiii] – page 15