Animals play a role when we talk about the stock market. If you’re a bull, or “bullish,” then you believe the markets will rise. A bear, or “bearish” investor, believes the market is going down. With the current market reactions to the Coronavirus Pandemic, I’m reminded of a story involving two other animals. Have you ever heard the story of the tortoise and the hare? I always enjoyed that story, especially the cartoon versions with Bugs Bunny!
In the story, the two animals race each other. Of course, everyone expects the hare to win, including himself, because he is much faster than a tortoise. During the race, the hare becomes arrogant, so he plays around while the tortoise stays focused on running his race. Instead of worrying about the outcome, the tortoise focuses on the variable he can control: running with his best effort. Spoiler alert! The tortoise actually wins! So, what can this story tell us with respect to investing and life in general?
First, let’s talk about timing the market. This is where an investor believes they know the exact moment where the market will turn up or down. This flawed investment strategy reminds me of the hare. Sure, he may experience some high returns, but he lacks discipline. Without a plan where the hare can focus on his goals, he loses sight of the finish line and loses the race. I believe this is why studies show traders who try to time the market rarely end up beating the market in the end. When we lose our focus in life, not just in investing, we start to fail. Look at how many distractions we face each day.
In times like these I think we are better served to invest like the tortoise. He had a plan to run his best race, regardless of what happened with the competition. He knew there would be ups and downs in the race, but what mattered was that he finished. When investing, we can’t only focus on expected rate of return. We must look at the big picture of where we want to be. For example, if I think I’ll need X amount in 30 years for retirement, then I am sure the market will go up and down during that time. I can’t stop these fluctuations, but I can stay focused on the end goal and give my money the best possible chance to help me be successful in my own race.
Constant, planned contributions to our accounts can greatly increase our chances of reaching our goals. This allows dollar-cost averaging to work through the ups and downs of the market. When the market is down, our contribution can buy more shares, allowing a lower cost per share if/when the market recovers. That can make the rate of return look better too!
I think it looks like giant tortoises are smiling. Perhaps, by following a plan, we can be like the tortoise and smile as we look toward our future.