“If a client says to me, ‘I’m concerned about a market crash,’ my answer is if you’re under 50 you should be rooting for a market crash because it would be nice to buy stocks that are 20 percent off, and then go 20 years to compound that discount,” he said. “Or if you’re much older than that and you’re concerned about volatility and market crashes, then you shouldn’t be in stocks and you should significantly lower your expectations for future returns.”
Next, Ritholtz showed a slew of headlines subsequent to the stock market’s dramatic upturn since the depths of the financial crisis in March 2009 that have proclaimed that a crash is nigh. Yet the markets have kept climbing—with a few brief drops sprinkled in—during that time. If those headlines filled you with angst and you decided to unload your equities based on those reports, you would’ve cost yourself a lot of money, he noted.
When a client came to him saying he wanted to sell everything because he read that billionaire hedge fund manager George Soros was buying put options, which are a bet that the underlying securities will fall in price, Ritholtz replied, ‘Of course he is, and if you were worth $27 billion like he is you’d occasionally buy puts to ensure some of your holdings.’
In addition, Ritholtz noted, some people make emotional decisions about their portfolios based on the political situation.
“In 2003, all of my Democratic friends and hedge fund buddies on the left were telling me that the Bush tax cuts were terrible and would blow out the deficit, would blow out jobs and would be terrible for the stock market. But we had a 90 percent rally over the next four years,” he said. “But Republicans shouldn’t laugh too quickly because fast forward to 2009 when President Obama was painted by some as a Kenyan Muslim socialist, so avoid the markets at all cost.”
Yet the stock market has tripled since the early days of his first administration.
Bottom line: politics and investing don’t mix.
“Anytime a client calls up to complain about whoever it is—lately it’s Trump and before that it was Obama—we send them one of these charts [showing the performance of the markets during the Bush and Obama administrations] and say, ‘Which of these charts do you like better . . . do you like the one where you’re out because a Muslim is elected and the market triples, or do you prefer the one where you’re out because the Texan is elected and the market doubled,” Ritholtz said.
People make wrong decisions whether its political or fear or whatever, he emphasized, but one way to mitigate the risk of stocks is to build diversified portfolios.
“Whenever someone tells me they don’t want to own stocks because they’re expensive, my answer is, ‘You just don’t own stocks; here’s what you own and here’s how it works,’” Ritholtz said.