I doubt I’m casting aspersions on Fool UK readers if I suggest most of us know what it’s like to have a hangover. Probably all too well!
For the benefit of the virtuous, a hangover is an all-over bodily unpleasantness that ranges from a mild tiredness through general squiffiness and right up to a dreadful doomed sensation that you’re right at death’s door. And what makes it worse – or at least poetic – is that hangovers result from hedonism. Perhaps that’s why we silently vow “never again” when nursing a hangover. It’s like the petition of a religious person atoning for their sins. Yet the miraculous thing about hangovers – to me anyway – is how quickly they pass. Mostly when you feel that sick – with flu or a stomach bug, say, let alone more serious ailments – you’re in for days or weeks of misery. But with a hangover it can feel like your repentant prayers were answered. You can feel awful in the morning and be up for it, Lazarus-like, by dinnertime. It’s remarkable. No reason to pursue the dire health consequences of drinking to excess, we can all agree, but a transformation that has to be lived in order to be believed. Which brings me (isn’t it obvious?) to the stock market.
Ouch my head! For investors, the past six months has followed the euphoria-to-excess-to-never-again-to-unexpected-recovery template of a hangover I’ve just described to a total tea. Shrugging off an early wobble in 2018, shares spent most of the summer near all-time highs. The sun was out and life was good. It was time to party – or more prosaically to be tempted into taking excessive risks in your portfolio. But then came the morning after the night before. From October to the end of December shares slumped. Was the long bull market over? It felt that way, and as markets declined by 20% or more they gave investors a hangover few could ignore. I heard some say they’d had enough – it was time to get defensive. They didn’t quite say “never again” but they sold their shares and took refuge in cash. It seemed a good move, for about five minutes. Yet in 2019 global equities have soared, racing back towards their old highs. And just like an evaporating hangover, the reversal was as unexpected as glorious. Even the Brexit-blighted British market has barely looked back this year. On a total return basis the FTSE All-Share is up 14%. Most of us would be delighted with that as an annual return. This has been achieved in barely four months. It’s enough to send even the most abstemious investor off looking for a tipple, whether to celebrate or to calm their nerves.
A marathon session Talking of drinking, let’s get back to my metaphor. Over time, hardened drinkers can become accustomed to the effects of alcohol and blunt the misery of a terrible hangover, albeit at the cost of rarely feeling very good. And it’s here that my comparison starts to fall apart. Because unless you’re engaged in a very few exotic professions – you’re a 17th Century pirate, perhaps, or maybe you’re a Russian soldier in the 1940s Red Army desperate to drink your comrades under the table – there’s no sensible reason to get accustomed to consuming more alcohol.
While many of us enjoy the odd glass or two – and that includes me – alcohol is a poison that does us no good. A hangover seems to be nature’s way of reminding us! In contrast, becoming better at riding out the swings from high to low in the stock market is a skill worth mastering. The more accustomed – and at peace – you are with volatility in share prices, the better you’re set for reaching your investing goals.
Make my portfolio a double To return to my tortured metaphor one last time, you don’t want to use your growing volatility tolerance to take things to excess. It’s good to be able to sit through a period like last autumn with equanimity, to keep regularly saving new money into your portfolio – and to not sell the shares you own. That’s the kind of pain tolerance that can make you rich in the long run. But start monitoring your portfolio too often – just because you can take the pain – and you may usher in destructive behaviours, such as market timing or even day trading. Moderation and steadfastness won’t make you the most exciting person in the pub – you won’t pick fights, end up on or under the table, or have exciting investing war stories to tell at the bar – but it will be best for your health and wealth in the long term.
Motley Fool UK 2019