What should you do when pundits predict a crash?

Posted by TEBI on April 12, 2023

What should you do when pundits predict a crash?




I keep seeing warnings that stocks are about to crash. Morgan Stanley’s Mike Wilson recently likened investors buying into the Q1 rally to climbers scaling Mount Everest without considering the risks. Two people who famously called the sub-prime mortgage crisis — the Lehman Brothers trader-turned-author Larry McDonald and Michael Burry, who inspired the movie The Big Short — have also warned of an imminent crash. Burry, it must be said, has apparently now changed his mind and apologised for urging investors to sell (thanks for clearing that one up, Michael).

Full disclosure: I’m a journalist, and I have no more of a clue than anyone else about whether a crash is imminent. None of what you read on this blog should be construed as financial advice. But I do know that vast amounts of money can be lost anticipating a crash that doesn’t actually happen. I also know that, once again, most active fund managers underperformed the index in the first three months of this year, mainly because they were expecting prices to fall when in fact they rallied.

If you too have seen these warnings of a pending bloodbath on Wall Street and are wondering what, if anything, you should do in response, I hope my latest article for Global Systematic Investors provides some helpful perspective.


It may seem strange, but it’s a fact, backed by academic research, that most of us would achieve better investment returns if we simply traded less often. We would probably do even better if we didn’t trade at all.

Of course, we need to get invested in the first place, and, ideally, automate our ongoing investments so the money goes out of our bank account without our having to do anything. But the point is, we can achieve great things as investors by doing precisely nothing.

Fidelity once conducted an internal review of customer performance. What it revealed was that two groups had distinctly better returns than any other. The second best returns were achieved by customers who didn’t trade (and had probably forgotten they had accounts at all), and the best returns of all were achieved by those who were dead.

The behavioural scientist and Nobel laureate Richard Thaler once posited that the ideal investor would be Rip Van Winkle. “Rip could invest in the market before his nap,” said Thaler, “and when he woke up 20 years later, he’d be happy. He would have been asleep through all the ups and downs in between.” And that, essentially, is the problem. You can’t just invest all your money in equities and go to sleep until 2043; you actually have to live through all manner of scary news stories between now and then.

ROBIN POWELL is the editor of The Evidence-Based Investor. He works as a journalist and consultant specialising in finance and investing, and as a campaigner for a fairer, more transparent asset management industry. You can find him here on LinkedIn and Twitter.



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