Stay the Course in the Next Bad Market?

There is a classic scene from the 1974 Mel Brooks masterpiece “Young Frankenstein,” where Dr. Frederick Frankenstein (that’s pronounced, “Fronkensteen”), played by the late, great Gene Wilder, must confront the monster he created in a locked cell. Before entering, he tells his assistants:

"No matter what you hear in there, no matter how cruelly I beg you, no matter how terribly I may scream, do not open this door or you will undo everything I have worked for. Do you understand? Do not open this door."

What happens next involves a lot of banging on the door and pleading from the good doctor, finally ending with, "Mommy!"

Besides being one of my favorite scenes in one of the best comedies of all time, I always think of this bit whenever the market hits one of its inevitable roadblocks, and stocks take a (black) swan dive.

Let me explain.

Just like Frederick, as an investor, I know I need to go into the room--or rather, the market. And just like Frederick, I know beforehand it won't always be a cake walk. I also know if I want to tame this monster, I've got to stay in the room, no matter what happens, or, yes, I risk undoing everything I have invested for.

And finally, just like Frederick, sometimes I cry for Mommy!

The Contract Here's the deal. The reason stocks have returned about 7% on average over the long run is precisely the reason it's hard to stick with them sometimes: the chance for wild swings, protracted downturns, and gut-wrenching volatility.

You don't need the returns? Don't buy stocks. But the reality is, for most investors (myself included), stocks are necessary to ensure we can save enough to last throughout retirement. And to have the best shot at getting those returns, you can't leave the game when the going gets tough. You have to ride it out instead.

Now, some may believe they can get the returns of stocks without feeling the pain, bail before a sell-off, then get back in after the coast is clear. It's a nice thought. But it just doesn't work that way. How many predicted that the markets would be blindsided by Brexit? Or the Trump win? Or the Lehman collapse? Improbable things do happen. Probable things do, too--but sometimes not when or how you expect them to.

Successful market-timing involves divining when to get out, but also when to get back in (lest you miss a big relief rally). And mind you, not just once, but every time. Is it possible? Maybe. Is it likely, every time? Nah. Not for me. Not if I'm honest with myself. I'm just not willing to bet the bulk of my own nest egg on getting those calls right consistently.

What's the alternative? For me, it's an unwritten contract with myself. If I'm going to invest in stocks successfully for the long run, if I need to capture those long-term average returns, part of the deal involves weathering these bad days, or weeks, or even months. I don't know when they will happen. I don't always know why ahead of time. I don't know how long. I don't know how bad. I just know they're going to happen (and they'll probably be the worst when I least expect them).

But the funny thing is, knowing that going in, beforehand, does actually make it easier for me to intellectually stay the course. Maybe I will pound on that exit door, but I also know I need this monster.

Stay the Course? You've Got to Plan For It When the market sells off, you'll often hear personal finance experts and fund managers pleading with investors to "stay the course." I'm not saying it's bad advice, but I do think, for someone who hasn't prepared for such a day, it can be awfully hard to do.

Whether it's an invisible contract like mine, a way to externalize your decision-making, a family member who's barring the door, or another mechanism that can put guardrails up and keep you on track, find it now. The markets may have recovered from a harrowing overnight drop following the election, but we're not out of the woods just yet. In fact, when it comes to stocks, we're never out of the woods.

So don't wait to conjure up your courage until you need it. Conjure now. Have a plan going in. Make sure your portfolio is properly allocated--including enough liquid cash to last you awhile, if you need it. Make a game plan, a set of rules, for when you should make trades (for instance, if your needs or allocation changes dramatically, or the fundamentals of an investment truly deteriorate)--and when you shouldn't trade. Envision what it will be like when the next big drop happens (because it will happen).

Then purposefully stride into that room, face the monster, and listen for the door locking behind you.