Historians doubt Marie Antoinette ever said, “Let them eat cake.” The apocryphal tale is that upon hearing that French peasants had no bread, she coldly suggested they eat brioche instead – a richer, more expensive pastry. Shame on you, Marie!
But historians doubt she ever said it. The quote likely originated decades earlier and was used to criticize out-of-touch aristocrats. Still, the myth stuck, fueling the image of a clueless queen and symbolizing elite indifference during the French Revolution.
Fast forward to modern times: I’ve been reading account after account of panic selling this week. The “Tariff Tantrum” or “Trump Slump” has instilled many investors with a deep level of fear.
For some, the fear is purely financial (“will my portfolio recover?”)
For others, it’s socio-political (“what will he do next?!”).
For many, it’s a mix. People are abandoning their plans and abandoning their portfolios.
I do not like seeing this. I don’t want anyone to make short-term, emotional portfolio decisions. But there are billions of people out there, and at least many millions are market participants. I cannot change all their minds. None of us can.
Unfortunately, some investors need to make a mistake in order to learn the lesson. And that’s why, as uncallously as I can muster, I think to myself: Let them trade.
Why Are People Trading Right Now?
Let’s walk through the most frequent reasons I see people trading right now.
The *ONLY* Good Reason
There’s only one “good” reason to trade right now: rebalancing your portfolio.
Personally, I rebalance both based on calendar and on thresholds.
Meaning, I rebalance every 6 months, simply to ensure that I won’t go years without doing it [calendar]. I’ll also rebalance when my portfolio allocations exceed 5 percentage points off target [thresholds].
There is no emotion in these decisions. It’s purely rules-based.
If your personal rebalancing rules are kicking in right now, carry on.
PS – yes, you could tax-loss harvest or execute a Roth conversion as a function of falling stock prices. But neither of those practices should involve selling one asset to buy a different one. Personally, though, as I write about in the links above, tax-loss harvesting is not the miracle drug that many DIYers believe it is, and it doesn’t make sense to wait for bad markets to execute Roth conversions.
“It’ll Get Worse…”
Many people are making drastic changes to their portfolio based on the belief that the economy, this new trade war, the world, etc. is heading in the wrong direction. The belief is that “it will get worse before it gets better.” Or even, “it’ll get worse indefinitely.”
You may be right. I may be crazy.
But I don’t know.
Sure, I don’t like what’s been done. I don’t agree with the decisions being made or, for that matter, many of the people making those decisions.
But I do know, for sure, that if you know, for sure, that stocks are a poor investment going forward, I don’t know enough to determine if you are right or wrong. Maybe it’ll get worse. Maybe not. I do not know.
Was that worded poorly? Basically: you might be certain, but I’m not, and I don’t know how you could be!
Some of you will read those words and say, “Jesse, of course it’ll get better. That’s what humanity does! We improve over time.”
Others will say, “Jesse, current events are pure insanity. Humans are irrational beasts! The world as we know it is crumbling. ARE YOU THAT BLIND?!“
Financial planning and portfolio design are exercises in probability and risk management. If I knew where the world would be in five years, I would triple down on my specific bets and become a billionaire.
If you know where the world will be in five years, I encourage you to do the same thing. Go make your billions! (…and don’t forget about little ol’ Jesse when you make it big!)
But if you’re like me and you’re not sure where the world is going, then I’d ask this:
How is that simple truth – that you and I cannot predict the future – any different than it was a month, a year, or a decade ago?
It’s not! We’ve never known how the future would unfold. Never. I build financial plans – for myself and others – with that fact in mind. Good portfolio design accounts for the fact that the future is inherently unknowable. That is one of the risks we take, and the major reason we investors demand compensation for investing.
And since that fact hasn’t changed, I am not changing my portfolio allocation.
Time will tell. You may be right. I may be crazy. But I’m not betting on it.
“Future Events Aside, My Plan/Portfolio Can’t Handle This…”
Other people look past the causal events (political, global, economic) and simply focus on their personal financial plans. They are concerned that their portfolio dropped too far and quickly over the past week and that the situation is untenable based on the sheer financial math. They need to cut their losses (from stocks) right now and re-allocate to a much more conservative portfolio.
The crazy thing is, some of these people might be right!
But if that’s the case, that truth (“I ought to be more conservative”) has been real for years. They should have reallocated their portfolio years ago. And only now, faced with the downside of carrying so much risk, are they realizing they had too much risk in the first place.
This is the driver who, only after crashing, is realizing they’re a maniac on the road. The crash itself isn’t the reason to change. It’s merely the proximate event.
Risk tolerance seems quaint when the market is doing well. But sudden negative shocks often make investors realize, “My risk tolerance isn’t what I thought it was.” This is where we insert that Mike Tyson “…until you get punched in the face” quote.
These tariffs didn’t change the truth. It just brought the truth to light.
So, some people have this fear and they are right about it! They should have been making these changes years ago.
Another group of people share the same fear – that their portfolio cannot handle such losses, or is misallocated – but are simply mistaken. Despite their fear, they ought to “stand there and do nothing,” as John Bogle would say.
That said, I completely understand where this mistaken fear comes from. Why?
Take a 65-year old retiree with $2M and a 60/40 portfolio. Their portfolio has likely decreased ~$150,000 in the past week, and $250,000 over the past 6 weeks. This is the equivalent of multiple years of living expenses. Scary stuff! I understand why this retiree might want to abandon ship.
However, their 40% allocation to bonds has remained essentially stable. That allocation accounts for 8-10 years of living expenses. The bonds are buying them time – literally! They must ask, “Should I assume my stock allocation can recover – and then some! – over the coming 8 to 10 years?”
The answer is likely “yes.” It’s not a guarantee, but then again, it never was in the first place.
“Inflation! Recession! This Industry, That Sector!”
Some investors are citing specific fundamental reasons for jumping ship.
Inflation is coming! A recession will hit before the end of the year! This sector is going to get crushed! That industry relies exclusively on imports!
Guys – ALL of that fear and ALL of that probability is already priced into the market.
Now, if the worst case comes to pass, then the stock market will surely get worse before it gets better. But if President Trump and/or other world leaders deviate in the next few weeks or months, then perhaps none of those fears will come to pass. The market is trying to suss that out, and it’s changing by the day hour minute.
There’s a good reason why the biggest UP days in the market occur concurrently with the biggest DOWN days. All of this uncertainty shakes out in both directions. We suddenly realize we’ve been more optimistic or pessimistic than we should have been.
The point is: whenever the market turns around, it’s likely to be sudden and sharp. If your money is on the sidelines, you won’t have time to get back in.
The same phenomenon happened in November 2023. It was amazing to watch unfold. And it will happen again – I just don’t know when, and neither do you!
Buy The Dip?
Some investors see current volatility as a chance to buy more stocks. “Buy the dip!,” they yell.
“Buying the dip” isn’t smart. Why?
An investor with an evidence-based financial plan shouldn’t be holding onto that much cash to begin with.
Sure, if we’re talking about a tiny percentage of excess cash that’s accumulated in your bank account, or interest and dividends in your brokerage account, then yes – go ahead and buy the dip. That cash has only been there for weeks or a few months, and it hasn’t crossed your mind to invest that money yet.
But if you’ve been holding 10% (or more) of your net worth in cash, waiting for a moment like this, the simple truth is that you’re playing a losing game. If it worked out for you this time, you got lucky. If you continue to play this game (hold cash, wait for a dip), you will suffer cash drag in the long run.
Buying the dip is like going to the casino. When it works, you feel smart. But the math is simple: you’re better off not playing in the first place.
Let Them Trade
You can lead a horse to water, but you can’t make them drink. There are many reasons why people are trading in their portfolios right now, and most of those reasons are not good. Unfortunately, history would tell us that many people learn painful lessons this way. Perhaps it’s the only route to learning those lessons. I’m just not sure. “Let them trade stocks.”
The only things you and I can do is:
- Control our own investing choices.
- Share good evidence about the right and wrong investing choices.
- Do our best to understand others’ reasonings and, if they’ll listen, share our own.
It’s not fun out there, but that’s part of the investing process.
If you found this helpful, let me know.
If you found this tone-deaf, also let me know.
Cheers!
Thank you for reading! If you enjoyed this article, join 8500+ subscribers who read my 2-minute weekly email, where I send you links to the smartest financial content I find online every week. You can read past newsletters before signing up.
On that note, our podcast “Personal Finance for Long-Term Investors” is by far outpacing this written blog. Tune in and check it out.
-Jesse
Want to learn more about The Best Interest’s back story? Read here.
Was this post worth sharing? Click the buttons below to share!
