Meir Statman is the Glenn Klimek Professor of Finance at the Leavey School of Business, Santa Clara University. His research focuses on how investors and money managers make financial decisions and how these decisions are reflected in financial markets.
It looks like things could get worse before they get better. How should we prepare ourselves?
Behaviorist Dr. Meir Statman unpacks what we each can do to prepare our minds and our hearts for what’s ahead as together the world navigates the unusual and often unforgiving waters of the global coronavirus pandemic.
Hello and thank you for tuning in to Ask Buckingham, an ongoing video podcast series where we invite thought leaders across many disciplines in wealth management to respond to your timely questions with timeless answers.
My name is Tim Maurer and I have the privilege of hosting these short discussions as the director of advisor development for Buckingham Wealth Partners. And I want you to know that I’m also a wealth advisor myself, with more than 20 years of experience, and a client of the firm.
The volume of information coming at us these days is so vast, and the pace at which that information arrives is so fast, but it’s a struggle to keep up with what you need to know in order to make the best decisions for you and your family. Our hope, therefore, is that this ongoing conversation will become a source of clarity in the midst of confusion and provide insight that helps you better understand what’s going on in the world, financially and otherwise.
Today we’ll be hearing from Dr. Meir Statman, a consultant to Buckingham and the Glen Clinic professor of finance at Santa Clara University. And, by the way, one of the world’s foremost authorities in the field of behavioral finance. And here’s the question we’ll be tackling:
Dr. Statman, we have to acknowledge in the midst of this chaos, in the midst of this literal panic and pandemic, that things could get worse before they actually get better. How then could we prepare ourselves for that potential eventuality?
Dr. Meir Statman:
Well, things might indeed get worse, not just in the stock market, but in our lives all together because we have a very dangerous virus that is out there. So we have to prepare ourselves, and when we prepare ourselves medically, we keep a social distance just to make sure that we don’t get infected. And the same applies to being infected by the panic that might be out there and that is likely to grab you if you are not aware of it, if you do not take proper precautions.
Now it is important to know that while it looks easy to pick the bottom of the market and get in just as it reaches its bottom, that actually is very difficult. If I take myself back to the events of 2008 and 2009, I know that in May of 2009, I spoke to a group of advisors, and that was already the time, that we know in hindsight, was beyond the bottom in the market. That occurred in March.
People ahead of me spoke about all the bad things that are coming and so on, but when I spoke I said, “Look, it’s really very hard to pick the bottom. This is why buying and holding is actually very smart.” I did not know then that we had already hit bottom and it was on the way up because every day markets go up and down and so you don’t really see the pattern. You see the pattern only months, or sometimes a year later.
And so, however difficult it is, stay tight, sit tight, don’t take action because you cannot call that bottom. And if you think that the markets will continue to go down and you get out now, well I don’t know. It might be that we are at the bottom now. It might be that we are far above that bottom on the way to recovery. It might be that it is still going to go down and we are going to hit bottom a month from now. Still, the wise thing in the absence of foresight about where the market is going to go is to sit tight and do nothing.
Yeah. And I think we struggle with that, don’t we? The whole notion that there is nothing that we can do that’s under our control, but we might suggest that there is at least one step that we can take that almost puts you on the offensive as an investor and that’s the discipline, the practice of rebalancing.
Dr. Meir Statman:
That is right. The practice of rebalancing gives people the sense that they are at least doing something, and it is doing something positively. It is hard to do because rebalancing here means actually putting more of your money into stocks. And if you must get out of stocks, at least get out of them gradually in this reverse dollar cost averaging. I don’t think that it is wise to do, but if you are going to get out, don’t get out all at once. Give yourself two years to get out. This way, at least you are going to mitigate the damage you’re going to inflict on yourself if you just take action in haste.
So you said social distancing is one of the habits that now I think we’ve all been taught and hopefully have adopted in order to better secure ourselves against the ills of the pandemic, but I guess we could also have a form of financial distancing when there’s so much negative headlines, especially in the financial media. Is that something that you would recommend, maybe separating ourselves from much of that commentary?
Dr. Meir Statman:
That is right, yeah. You should think of that commentary about where the market is going to go and so on as being fiction. It is really people who pretend to know what they really do not know, so don’t let yourself be infected. You will see on television, you’ll see on the websites, all kinds of advice that comes in, but remember, again, that investment is not a philosophy, it is a science. And we should apply not philosophy, but logic and evidence. And the evidence suggests that trying to pick the bottom of a market is a fool’s errand. Don’t try to do that.
Thank you so much, Dr. Statman, and thanks to you for tuning into this episode of Ask Buckingham. If you have a question that you’d like to see us address, you can do so by navigating the website www.askbuckingham.com, or emailing your question to firstname.lastname@example.org, or just click here on the screen and it’ll take you directly to the website.
Remember, there are no dumb questions, but unfortunately, there are plenty of dumb answers out there. Our hope is that in giving you straight answers to your questions, you’ll be able to apply that knowledge in pursuit of good decision-making. So please follow us. And by all means, ask Buckingham.