This phrase captures an idea developed over the course of many years of collective institutional investment management experience during challenging performance periods not dissimilar to what we are experiencing today. The principle we are espousing is that doing nothing is not the same as thoughtfully doing nothing. It isn’t meant to be dismissive or snarky; it is meant to be illuminating of what we believe to be a wise response to market volatility and difficult performance. And there is a difference between ignoring a bad situation in the “hope” it goes away as compared to choosing to stick with your investments and strategy after extensive critical review. The first approach can be disastrous while the second can be a path toward long-term success.
When uncertainty arises and capital markets become volatile, there is a tremendous pressure on financial practitioners to “do something!” This pressure comes from all sides: It comes from oneself, it comes from clients, and it comes from colleagues. In the final analysis, it is human nature to try to “do something” in response to volatility and uncertainty. It makes us feel better and feel empowered when we do. But does it really accomplish anything? Sometimes it is right to act and sometimes it is right to do nothing.
Here's a scenario where it might be right to act in response to negative returns. Market volatility and sharply down markets can expose investment errors. We may learn in these episodes of certain weaknesses inside our investments or certain flaws in our investment thesis for a particular investment. Once such weaknesses or flaws become known, it is always appropriate to reconsider the investment and most often appropriate to eliminate it. We at WealthPlan are vigilant to eliminate such errors when we become aware of them. And there should not be too many of them if we are doing a good job in our original investment research prior to committing capital.
Here's a scenario where doing nothing might be appropriate in response to negative returns. When markets are in decline, almost all investments and with very few exceptions, go down with the broader market. It could be that a company is executing its business plan perfectly…but market conditions are such that PE multiples (stock valuations) are coming down because interest rates are going up. For example, consider Apple. In our view this is exactly what is happening with Apple’s stock in this market environment. In this case, we think thoughtfully doing nothing is appropriate: Apple remains a world class brand with world class products and is a very well-run company. The same thinking goes for the broader asset class strategies we manage. We generally like what we own and will continue to own them through this market downturn.
This concept of “thoughtfully doing nothing” also applies to your individual financial plan that you have developed with your investment advisor. This plan reflects your unique circumstances and attitudes about investing and risk. It also reflects your wealth accumulation goals and retirement income goals while incorporating the long-term wealth-generating properties of the capital markets. A well-developed plan can and should consider the possibility of market losses and periods of pain. If done well, a financial plan will allow you to accomplish all your goals and “sleep well” at night—even when bouts of market volatility and negative returns are occurring. If you need reassurances or are wondering if you’re still on track with your plan, we encourage you to have a conversation with your advisor. If it is appropriate, adjustments can be made. You also might learn that doing nothing is the best approach for your situation. “Thoughtfully doing nothing” is one of the hallmarks of a successful long-term wealth plan. And it is not the same as sticking one’s head in the sand…that’s doing nothing.
*Readers should note that WealthPlan Group is not making any type of investment recommendation with regard to this particular company. The Commentary’s statement is simply made as an illustrative comment by the author to better explain the concept of market conditions and their relation to a company’s price-to-earnings ratio.