Should I Stay Invested if a Recession is Coming?
Today's "Finance Friday" question is, "What should I be doing in my portfolio, given that everyone says there's a recession coming?" So, I recorded a video last quarter that I meant to post earlier, but here's a quick video clip talking about that and some nice scenery along the way, of course.
Well, I wanted to stop really quick - the first larches of the hike are behind me. But we still have some work to do going over that pass. I just wanted to pause really quickly. We're hearing the word recession a lot. We just had two quarters of negative GDP growth or GDP decline, not growth. And so that, historically, has somewhat fit the definition of a recession. The NBER decides or determines when we're officially in one and they haven't determined it yet.
But, whether they announce it or not, we've had two quarters of GDP contraction. So, we're still hearing the word recession being thrown around though, maybe this year and maybe next year. And I just want to pause and give you a sense of what determines market prices.
There's a whole world of investors out there, some of them institutional investors, some of them individual investors. And, if you look back at 2021, the daily volume in the markets was $774 billion being traded on a daily basis. I did the math, and that is 3 Elon Musks. So, his net worth was three times each day on average during 2021. So there's a lot of of data, a lot of trades being placed to help settle on what we believe today's current price should be for any given security.
So, when you take all of that information, you end up with the current prices. So if you want to do something or make a change, you have to say that all of those market participants are wrong. They all already heard the word recession too, and they've made their trades and they've bought and sold things that they thought were right or wrong to hold. And they're sitting here today saying, "Hey, we believe this is the right price for the markets as we stand right now." So just want to pause there, give you a quick sense of what determines market prices.
When you look at a large number of people trying to determine a value on something, it's honestly one of the few times that adding more people can add some accuracy. There was actually a test given one time, it was "How many jelly beans are in a jar?" And it was given to financial advisors, and there was a whole range of guesses. Some people guessed as low as 409 in the jar. Some people guessed as high as 5,365. The average of all of those guesses was 1,653, and the actual amount of jelly beans in the jar was 1,670. So, by taking the average of everybody's guess as to how many jellybeans there were in the jar, they were actually fairly accurate.
And that's why it's so hard to time the market. It's because there's 3 Elon Musks of value being traded every day. And it's hard for any individual to know more than that mass of people and institutions and traders and basically holders of securities in general. So, it's tough to time the markets. Everyone has heard the word recession already and they've still settled on the current prices that we have today.
So, hearing the word recession doesn't necessarily mean you should jump out of the markets.