pessimismA few months ago I read a superb piece by Morgan Housel entitled “The Seduction of Pessimism” that should be required reading for ANYONE who invests money today for their long-term future needs – like retirement.

Lately I can’t help noticing the recent uptick in headlines warning that “markets are overvalued” and/or “we’re in a huge bubble.” Goldman Sachs, Forbes, The Motley Fool , PIMCO, The Street, Seeking Alpha, and all the usual bears (from Hussman to Rosenberg) are trying to get ahead of the bad news cycle. Even Vanguard’s Bill McNabb got into the action, warning that we should expect a “decent-sized correction at some point.”

Clever guy that he is, he was deliberately vague about what he meant by “decent-sized” and “at some point,” so that no one can hold him accountable if his predictions don’t come true in the next few months. Nonetheless, the message is clear that McNabb thinks markets are ahead of themselves.

So, what’s a long-term investor to do? A few weeks ago David Bianco of Deutsche Asset Management said, “A 5% pullback could happen within weeks” and the CNBC article in which he was quoted offered ideas on how to “protect” yourself.

Really?

Why should we endeavor to protect ourselves from a 5% pullback?  While we haven’t seen one in some time, 5% pullbacks are the sorts of things that historically happen every 4-5 months. They usually interrupt the longer term natural progression of the markets about 2-3 times a year. They define, along with the occasional larger market zigs and zags, “NORMAL” volatility.

pessimism

A long-term investor should do nothing to prepare for a 5% pullback, except maybe allocate some additional funds to their investment portfolio for when said pullback happens, which it inevitably will.