What a Roman Dictator Can Teach You About Investing in a Down Market
The audacious Carthaginian military leader, Hannibal is revered as one of the greatest military tactician and battle strategists of all-time; his leadership and decision making are still studied to this day.[1] Hannibal was famous for bold decisions, such as marching through the alps with elephants to surprise the Romans in their own territory. He led some of the most famous military victories and was successful in his tactical objectives, however, in the end he was a strategic failure because he was unable to achieve his long-term goal of capturing Rome.[2] Fabius Maximus was the Roman dictator during this time. He was not known for his bold and audacious moves. He allowed Hannibal many tactical victories, a choice that came at a high cost. It likely felt like Fabius Maximus was intentionally doing very little; but his inaction was very intentional as this strategy weakened Hannibal’s army through attrition. This became known as the Fabian Strategy. This strategy was not popular at times with the citizens of Rome, who slandered him by calling him the Delayer.[3] However, Fabius Maximus never deviated from his strategic goal which was not allowing Hannibal to capture Rome at all costs.
How is military history relevant to investing? Stock markets ebb and flow. They can enter a correction (-10% from the highs) or a bear market (-20%) periodically, without warning, and for prolonged periods of time.[4] [5] When these events happen, and they will, we have two choices, a tactical one, or a strategic one. We don’t know where the market is heading next and anyone who will tell with certainty isn’t being truthful. If we think we know where it’s heading, we are merely allowing ourselves to pretend that we have control of the situation, which is an illusion.[6] We can’t control what the market does. All we can control is how we react to it. Our brains crave certainty.[7] Unfortunately, this isn’t how markets and risk operate. A tactical option may be selling stocks to stop the losses from continuing. This may feel like a wise choice. Statistics are not on your side; timing the market, since you need to sell at the high and then buy again at the low rarely outperforms the buy-and-hold strategy over the long-term.[8] [9] [10] So, in the short-term, selling may feel like a tactical win, and who knows, you could be lucky and time it perfectly. However, achieving this for a long duration is exceptionally unlikely, and doing so comes with the added stress and anxiety of trading frequently. Selling and then re-entering the market risks missing the best days. Charles Schwab noted that missing the ten best days per year resulted in over a 4% annual return deficit during a twenty-year period in their study.[11]
Lastly, if you must sell some assets in order to have reprieve from the emotional turbulence of a down trending market, make sure you do it in an account that allows it. The TFSA is not intended for frequent trading and could have serious tax implications if done improperly.[12] It is worth noting, if you must sell some assets for an unforeseen reason like an emergency, or a preplanned expense, that is separate from this discussion. Life happens outside of corrections and bear markets. Resisting to sell is important if this money is intended to stay in your account for a long time.
During turbulent times, the best action you can take is inaction. Channel your inner Fabius Maximus and don’t deviate from your long-term strategic goals. This doesn’t mean you won’t have tumultuous days, strained emotions, or the feeling of defeat and despair. But you simply cannot let these emotions guide you. Succumbing to them is allowing the illusion of control to take the wheel.
There is no sugarcoating it, losing money sucks, period. Pretending otherwise is pretending emotions don’t exist. But we mustn’t allow volatility of the markets to create volatility in our goals, emotions, and life. The best thing we can do is take the punches when they’re thrown but remain steadfast for the long-term. Easily said, harder in practice.
The content provided by Beyond Your Pension is intended for educational purposes only and does not constitute personalized financial advice. Please consult a qualified financial advisor for guidance specific to your individual circumstances.
[1] Skelton, C. I., & CEBROWSKI, A. K. (2000). Whispers of Warriors: The Importance of History to the Military Professional. Naval War College Review, 53(3), 7–20. http://www.jstor.org/stable/44638330
[2] Kluth, A. (2012). Hannibal and me: what history’s greatest military strategist can teach us about success and failure. Penguin.
[3] Kluth, A. (2012). Hannibal and me: what history’s greatest military strategist can teach us about success and failure. Penguin.
[4] https://www.investopedia.com/terms/c/correction.asp
[5] https://www.investopedia.com/terms/b/bearmarket.asp
[6] Kahneman, D. (2011). Fast and slow thinking. Allen Lane and Penguin Books, New York, 2.
[7] Wilson, T. D., Gilbert, D. T., & Centerbar, D. B. (2003). Making sense: The causes of emotional evanescence. The psychology of economic decisions, 1, 209-233.
[8] Sharpe, W. F. (1991). The arithmetic of active management. Financial Analysts Journal, 47(1), 7-9.
[9] Fama, E. F., & French, K. R. (2010). Luck versus skill in the cross‐section of mutual fund returns. The journal of finance, 65(5), 1915-1947.
[10] Grinblatt, M., & Titman, S. (1992). The persistence of mutual fund performance. The Journal of finance, 47(5), 1977-1984.
[11] Stay the Course When Markets Turn Turbulent | Charles Schwab
[12] https://www.moneysense.ca/save/investing/tfsa/day-trading-in-a-tfsa/
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