I recently had a conversation with a colleague and friend in the military who demonstrated the temptation frequently faced by investors: giving into the emotional banquet of “market” stimuli served up by the media and catered by the financial services industry.

My well-intentioned friend is an educated military officer in his mid-thirties.

An engineer by education with a graduate degree to boot, he’s highly analytical and logical. The conversation started as a casual discussion on a recent decision he’d made about moving approximately 40% of his retirement account into bonds. My eyebrows were raised and my interest piqued.

I inquired as to his reasoning for the dramatic re-allocation: in essence, he had a sense that the market was peaking, and that recession was imminent. When I pressed for the basis for his opinion, without recalling it by name, he cited a somewhat fringe variant of the Price-to-Earnings ratio which indicated that markets are overvalued. He also cited the length of the current bull-market as grounds for belief that correction or recession was imminent.

I was reminded of some convictions I’ve centered my financial “belief system” around:

First, Wall Street makes hundreds of billions of dollars selling investors products to assuage the fears propagated by media; the cycle feeds itself like a self-licking ice cream cone.

You would think that after a hundred years of the modern, exchange-based stock markets, Wall Street would have cured all of our ailments with various insurance and structured products, but it seems the virus keeps mutating!

Secondly: long-term market participation rewards patience.

This notion is the anthem of Bogleheads (yours truly included), and has be become a common refrain inside basic financial education. Living by this truth is altogether a separate challenge. I’m reminded of my college Economics professor who introduced me to the “theory of revealed preferences.” On what must have been a full moon in which my mind was singularly focused on Dr. Rappaport and not soccer, fishing, or snowboarding, he summarized the theory as:

“what you actually do as opposed what you say is the best representation of true convictions and preferences.” This is where the rubber meets the road for investors when times get tough, or we assume that tough times are ahead.

Most of us understand inherently that in exchange for volatility, stocks return more than bonds over the long-run, and the opposite is generally true for the bond market. There are certainly deviations over the short-run, but this has been the case during periods of time that have included two periods of economic turmoil, and full-scale world war. Sticking to or abandoning this empirically-supported fact can make or break retirement savings goals, especially for those with longer time horizons. There’s no gut-check like a market correction to test our mettle, but curiously, this particular individual was trying to “call the top” of the market. The perils of market timing have been written about in previous posts, and will no doubt be discussed in the future, so for now, I’ll conclude with the reminder

that long-term wealth is seldomly built on intuition and emotional decisions about market movements.

Doing so can have quite the opposite intended consequence. Having a plan and a portfolio designed to weather difficult market conditions can serve as the harbor in the storm of either expected or realized market volatility.

Investment advice and financial planning offered through Financial Management Inc., a Registered Investment Advisor.