LIVE MARKETS-Dimensional's David Booth on recognizing the unknowable and trusting the market

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DIMENSIONAL'S DAVID BOOTH ON RECOGNIZING THE UNKNOWABLE AND TRUSTING THE MARKET

With decades of investing experience to draw on, Dimensional Fund Advisors co-founder David Booth has a lot to say about navigating the market.

One thing he brought up repeatedly in a recent conversation with Reuters, is that rather than panicking and heading for the exits when things look scary, it is important to accept that there is a lot you cannot know or predict.

The chairman of Dimensional - founded in 1981 and currently with $786 billion under management - pointed to the COVID pandemic as a prime example. In the height of the pandemic, the S&P 500 fell more than 30% between Feb 19 and March 23 2020, but it ended up advancing more than 16% for the full year 2020.

"Looking back on it I don't know too many people who thought, well, I should have known. You just don't know. It's the unknowable. Some things about an economy are just not knowable," he said regarding the market's quick recovery.

"The year before COVID, I didn't see anybody running around yelling, we're going to have a pandemic next year."

So, if you accept what you don't know, what's next?

"Part of what we do is try to get people to think about the long term so they don't get too overly stressed about the short term. There's not much evidence being stressed about the short term helps you in the long term," said Booth.

"It's very difficult when there's a lot of anxiety and uncertainty out there. It's hard for people to stay the course but, going back to March of 2020, the risk of getting out is really a severe risk."

Booth argues that the market does a very good job setting prices. So when an investor decides to go in a different direction, they'd better have a very good reason.

For example, when deciding whether it would be wise to cut back on riskier investments, people should look at their own situation - their job security, their housing situation, whether they are close to retirement or sending a child to college.

"In my view, you're better off assuming the market has it right and looking at what else is going on in your life," he said. "You're better off assuming that than saying it's wrong and I'm going to bet my life savings on the fact that I know the market missed out on something. That's scary to me."

The market veteran takes a similar tone when discussing current uncertainties, such as the widening U.S. deficit, which he describes as "a real problem."

"If there weren't a deficit, maybe prices would be higher, or maybe they may be lower. Maybe it's a deficit that's pumping up prices. But trying to make a portfolio decision based on your attitude about the deficit is problematic," he said.

(Sinéad Carew, Caroline Valetkevitch, Chuck Mikolajczak)

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