The “zoom theory” and market gyrations
As we sat around after a recent family cookout, talk turned to the stock market’s recent gyrations.
The older folks (I am, of course, in that camp) were grumbling about the spring slump in stocks. After listening to his middle-aged relatives talk about the damage to their retirement portfolios and their varied views on the market, my 20-something nephew, Rob, confidently said he saw no reason to fret.
“I just keep the zoom theory in mind,” he said.
“Zoom theory?” we asked. “What’s the zoom theory?”
He borrowed a pen, grabbed a paper plate, and drew a graph. Here’s a close replica:
Rob said that when you focus on the stock market’s recent performance—in effect, “zooming in” on the near-term—the market’s zigs and zags seem really significant. But if you zoom out and look over a longer horizon, the market’s short-term gains don’t seem quite so impressive and the short-term declines don’t seem so scary.
“What you have to do is zoom out, not focus in,” he advised.
It’s not a bad idea. Students of behavioral finance have long noted that human beings are naturally susceptible to “recency bias”—the tendency to overweight recent experiences when forming your view of the future. In up markets, this bias can cause investors (or home buyers or mortgage lenders) to be overly optimistic and to take on more risk. In down markets, recency bias can lead an investor to assume that returns will continue to be terrible.
Of course, an investor’s time horizon can affect how easy or difficult it is to “zoom out” and take a long-term perspective. When you’re 20-something and your retirement plan balance is still relatively modest, it should be easier to react with equanimity to a market downturn. For younger adults, human capital (the earnings potential over their working lifetime) is likely to be far larger than their financial capital. For a 50-something investor, for whom retirement is five or ten years away, the situation is likely to be very different.
The key, obviously, is to set your portfolio mix of stocks, bonds, and cash to try to manage how much zooming and diving you feel you can withstand—both emotionally and financially.
Personally, I expect to encounter ups and downs in the markets and my portfolio balance. But the most thrilling roller coasters—I’ll leave those to Rob.
Note: All investments are subject to risk. Investments in bond funds are subject to interest rate, credit, and inflation risk.
This is one of the most insightful yet simple concepts I have ever seen in finance. It should help folks out a lot. I think whether you are looking to zoom in, zoom out, or not zoom at all, you must understand your view is always a little distorted. Adam Smith, John Nash, Rob?
Craig, I think Rob is saying “stay the course”. I think I’ve heard that before. I,m in my 50s and I have been staying the course, or zooming out for probalby too long now. Thanks for the advise - from both of you.
As a 71 year old, I agree that it is necessary to have a diversified portfolio with asset classes in percentages based upon your risk tolerance.
Zoom Theory developed by a twenty year old. I doubt that!!
what is different from views of 50 years hold stocks for the long term and every thing will be wonderful. Unless a person become of retirement age in down time in the the stocks and bond markets.
Yes Craig a good insightful article.Is the stock market influenced by the population? As we Boomers retire will less dollars be invested and will the Zoom theory still be viable?
Zoom or not, for the past 15 years all of us that stayed the course are essentially no better off for it. Staying the course into your 60s means you are dumber than a rock.
I was looking for actual information. Articles like this in my mind dimension the credibility of Vanguard.
I’m in my late 60’s, just sold my business so I could retire, and I have some very cautious views of investing in the current environment (32% in cash, 63% in bond fund). We have not had the current political environment in my lifetime and it worries me greatly. Right now I cannot just accept that we will return to the long term trends in the market that have been at work for the last century!
I agree with the late 60’s person who just sold his business. Since “Financial Reform” turns out to be only a tepid version of what it could have been… The “cowboys” are still free to play with our retirement funds… and lose them for us. Bonds are not even the safe havens they used to be.
There is only one way to have solid markets: Regulate, regulate and regulate.
The “zoom” theory sounds like good advice, but thats what we have heard for years. Stay the course, don’t time the market, and watch out for inflation. Age is a big factor, but so are the guys in lower Manhattan, i.e. Wall Street. We do need regulation and are Not getting it. Its our retirement money those Wall Street guys are playing with and they make their own rules.
Advice for the “Boomers” and I am one of them…Watch Out! All the old tried and true rules have changed!
I feel as the two July 29th responders do. A major change is how technology over the past 10-12 years has affected and upended all past traditional workings of markets. No one can keep up with it except the “cowboys”. I’m 70, and am feeling the outlook is dismal.
Given the current economic situation, Congressional gridlock, the deficit, growing unemployment and corporate offshore outsourcing, I see no place in the equity market for individual investors older than 50. There is more regulation of Las Vegas casino gambling (and a greater guaranteed rate of return) than of the banking and investment industries. In the last decade the government has maitained a hands off policy which is devistating to all but the wealthiest Americans. Proper allocation is “protect your principle”. Better to gain little with cash equivalents and highest quality short term bonds than to lose you srirt.
If the zoom theory is so great and if buy and hold is the best thing for all of us not on Wall Street, then why are the guys making all the bucks running/investing in Hedge Funds, high speed trading, CDSs and all that stuff?
Vanguard is only pumping this at us so we will let them take a cut (albeit a small cut) of our principle every day.
I have chosen VANGUARD for my investment firm due to the principles set forth by it’s founder John Bogle. I believe in the man and his opinions. Yes, the investment market has changed since 1976. One import basic that has not changed that guides all attitudes about financial investing and that is the power of individual TRUSTWORTHINESS. In my opinion, the greater one’s reputation of being TRUSTWORTHY, regardless of the present circumstances, the more likely his or her followers will listen and stay the course. Rules and regulations are no guarantee that the truth is protected in investing or any other process created by a nation’s people.
This article really was a useless ‘fluff piece:’ old duffers are reminded of a heartwarming truth from a young whippersnapper. The only problem is that Rob’s paper plate indicates an upward trend in the market since inception. Which market is HE invested in? I’m 59 & I just clawed my way back to what I had prior to the last big downturn. Back then, I’d only just clawed my way back from the downturn before that. I’ve done all the “right things” but since year 2000 I’ve had little lasting growth in my portfolio. At least Phil Gramm is out of the picture–he wrote the amendment that kept derivatives unregulated…
Funny analogy comes to mind. His Zoom Theory in regard to older vs. younger investors sounds like comparing older vs. younger eyesight. Older eyes change, causing viewers to focus on a smaller range…can’t see close, can’t see far. Younger eyes can see closer and further. Older investors naturally look at shorter periods of time to analyze return/risk. Younger investors can analyze their investments over many years.
The lost decade emotionally tests my “stay the course” conviction. But, if not this what? Predicting the future? Acting on that guess? That scares me even more. I’m zooming out, making the bet that principle will stand the test of time….again.
The Zoom concept is not new, just another name for looking at the market over different time periods. As a 70 year old I do fear we are in for a longer period of mediocre performance. The inflows from baby boomer 401K savings will also effect the level of investment, this coupled with high unemployment means that 401K investment growth as we knew it in the late 90’s will be slower. I do applaud Vanguard for their low expense ratios and honest presentaion. Anyone who had a 401K plan in the early days saw their meagre earnings reduced further by ratios in the 2.5% range. Most of the portfolios were “Dog” funds that were poor performers. I think public awareness has changed that now.
I do not see a return to the levels of the markets before the recession until 2020, if then.
Worth reading, cheering not a bad thing!