What have 2018 and 2022 had in common for me?

If you recall, 2018 ended on a sour note across many asset classes, and this year’s market performance isn’t looking much better.

Thank goodness I’ve had the FIFA World Cup to take my mind off the market’s challenges. I love soccer—whether viewing or playing—and the chance to watch the best in the world compete for their country only happens once every four years. For me, this year’s tournament was even more exciting than 2018.

Shooting for the Middle

Why bring up soccer in the context of investing during a down year?

Well, unless markets pull off a shock upset like Saudi Arabia’s improbable win over Argentina in this year’s tournament, a globally diversified stock and bond portfolio is likely to end up in the red for 2022.

While negative performance and declining personal balance sheets can worry even well-diversified investors, we know investors’ best move is to probably sit tight. As it turns out, that’s exactly what soccer goalkeepers facing a penalty kick shootout should do, too.

When a penalty kick is taken, the ball is placed just 12 yards from the goal line and often kicked at speeds of 60 mph or more. The ball reaches the goal so quickly that the goalkeeper has little time to react. Instead, goalies are forced to guess in advance whether to dive left, dive right, or stay centered in the middle of the goal.

While most penalty kicks are not stopped by the goalie, various studies have revealed that soccer goalkeepers were more than twice as likely to deflect a penalty kick by remaining planted in the center of the goal, rather than by diving in one direction or another.

Interestingly, however, the data also shows that hardly any goalkeepers do stay centered. More often than not, they dive left or right believing their efforts will be rewarded.

Whether they truly believe their diving efforts will result in stopping a shot or they simply fear the consequences (irate fans, coaches, and losing their jobs!) of “doing nothing,” most goalies dive one way or another. But that data clearly indicates they’d stop more penalty kicks if they resisted the urge and remained centered.

To React Is Human

As a lifelong soccer player, I can empathize with professional goalkeepers’ effort and motivation to stop a penalty kick, despite the long odds of doing so. Still, the human instinct to “do something” is powerful!

But, the data is clear, just as it is in investing.  We would be best served by not stretching for reactionary plays—attempting to predict which way the market will go.

Today, investors may fear an economic recession will bring additional losses to their portfolio. Would they be wise to get out of the market?

Let’s suppose you had an uncanny (and unlikely) ability to predict the beginning and ending of economic recessions. Furthermore, you exercise that incredible power to sell stocks precisely when an economic recession is announced and to get back into stocks at the exact time the end of a recession is officially announced.

Would doing so enable you to have outperformed a disciplined, buy-and-hold strategy?

You may be surprised to learn the answer is “no.” Over the past 90+ years, and using the S&P 500 Index as a proxy for the market, a buy-and-hold approach would have outperformed a timing strategy aimed at avoiding a recession.

In the graphic below, a disciplined investor’s $1 (in light green) would have grown to around $18,000 from 1933 to 2021. The $1 invested by the market-timing investor seeking to avoid recessions (dark green) would only have grown to around $15,000—and that’s not even considering market timing’s more frequent trading costs and taxes on realized gains.

How is this possible?

Markets are forward-looking, while economic data often comes with a lag. In soccer parlance, markets often kick to the right just as the economy jumps to the left. As a result, some of the stock market’s best scores have happened while economic news remained bleak.

The 2020 COVID pandemic was the most recent example of this, when markets surged based on forward-looking expectations, even while global economies were still on life support.

Investing Isn’t Soccer

As much as I love soccer, it’s ultimately just a game. Investing, however, is not a game. Every move you make—or often, sensibly, don’t make—can significantly impact your financial well-being.

That’s why it’s important to follow the evidence in managing wealth—particularly during challenging markets when recession fears may spike.

If you have a well-structured portfolio and your personal goals haven’t changed, your best move is probably to resist the temptation to dive right or left, and instead stay centered by sticking to the plan.