market volatility

A 10% Correction is Coming!

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There is an amazing thing about the performance of the stock market this year. Looking at the S&P 500 Stock Index, it has hardly dipped more than a few percent from its peaks. There has been a little wiggling, but far less than usual.

We human beings have a remarkable capacity to get used to current conditions, and expect them to persist. This could make trouble for us when the 10% market correction does eventually come around.

Long time clients know we believe that these market drops can neither be predicted nor traded profitably. Many of you call when the market does drop, seeking to invest in any bargains that appeared. We know how this works!

(Of course, we do not own ‘the market.’ Our holdings—and your account balances—sometimes deviate from the direction of the market. In 2016 we were fond of the difference. 2017 so far, the market is a little ahead of us. The point is, the market wiggles up and down, and our performance relative to the market also moves around.)

Commentator Morgan Housel recently wrote “every past market crash looks like an opportunity, but every future market crash looks like a risk.” Our experience after the 2007-2009 downturn demonstrated the first part of that statement. It is the next market crash that we must be concerned with.

Our research process is focused on finding bargains. We’ve taken steps in many portfolios to dampen volatility by changing holdings. Cash levels are generally higher, too. But none of these things will eliminate the temporary fluctuations that are an integral and necessary part of long term investing.

The market will decline. Our portfolios will decline. These declines will seem like a risk when we are going through them; we may see later that they really were an opportunity. The relative calm we’ve experience recently will give way to more volatile times—we know this, and should not be surprised by it.

We’re working to be in position to profit from opportunities that arise. Clients, if you would like to discuss your situation in greater detail, please email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Investing involves risk, including possible loss of principal.

A Drop or a Loss?

© Can Stock Photo / jamdesign

Recently a client informed us that another person told her that her primary investment account may be invested too aggressively. We asked what the basis was for that conclusion. The explanation: “If the market corrects, I would lose money.”

Anyone who has followed us for any length of time could probably spot the two questionable ideas contained in those eight words. It is worth discussing, because, in our opinion, getting these ideas right may help our clients build wealth more effectively.

1. There is no “if” about the next market correction, it should be when the market corrects. Why act as if we could avoid corrections when we know they will happen and they cannot be reliably predicted nor traded?

2. Is a drop in the market a loss?

We have many long term clients who have lived through dozens of 3-5-7% drops, a fair number of 10-20% declines known as ‘corrections,’ and three or four bear markets with drops of more than 20% in the major market averages. Yet they are sitting on cumulative gains—account balances in excess of the net amount they invested. One might reasonably ask, “what losses?”

The key to our plan, of course, is remaining on course even in difficult conditions, which we know will happen from time to time. We described our efforts to build a client group with this characteristic in our article Niche Market of the Mind.

It is worth mentioning that much of the conventional wisdom about investing assumes that, indeed, a drop in the market is a loss. Furthermore, since many people behave ineffectively when it comes to investing, the conventional wisdom seems to be that everybody behaves ineffectively—doing the wrong thing at the wrong time, again and again—as if it is inevitable for everyone.

It is almost as if statistics about the average weight and exercise habits of Americans are taken as proof that no group of relatively fit people show up at the gym at 6 AM to work out.

We are grateful to be working with you, a group of clients who are disciplined and fit when it comes to effective wealth-building behavior. If you have questions about this or any other topic, please call or email us.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

Human Nature Creates Investment Opportunity

© Can Stock Photo Inc. / soupstock

Economists like to believe that human beings act rationally. Those of us that know otherwise follow the theory of Behavioral Economics instead.

One of the key findings of Behavioral Economics is that the pain of a loss is twice as great as the pleasure of a corresponding gain. Rationally speaking, $5 is $5, whether it is gained or lost. But we still feel the sting of the loss as a bigger deal than the pleasure arising from the gain. This is human nature in its raw, untrained state.

Confounding this finding is an extremely pertinent point, one that is ignored by the academics and the finance types who trade off their work. They treat a temporary decline as a loss. There is no shortage of expensive products designed to pander to this tendency by selling the promise of stability at a premium.

In the real world, many successful investors treat a temporary decline as either an opportunity, or a matter of no long term consequence. For most of us it takes education and training to overcome our behavioral tendency to feel the pain of a loss over short-term volatility. We’re here to help you with that.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Broken Clocks and Market Timing

© Can Stock Photo Inc. / Pshenichka

The first quarter of 2016 is drawing to a close, and as of this writing the S&P 500 Index is roughly where it was at the start of the year, hovering a meager half a percent under the December 31 close of 2043.94 after having peaked half a percent higher earlier last week.

One might conclude that it has been a very boring three months for the stock market—we’ve spent 90 days to get back to where we started from. But we’ve had quite a rollercoaster in-between. In the first half of the quarter the S&P dropped about 10%, only to have an equally dramatic bounce back.

We had some calls from worried clients after that drop. (Not many, though—we know our clients, and they know us and our philosophy.) We would certainly like to take credit for having righted the ship and reversing the decline. But the truth of the matter is that there is a lot of random noise in market movements. We believe that we may be able to capitalize on long-term market trends; we do not pretend to be able to predict what the market will do day to day or month to month.

We do know that every once in a while there will be a short-lived 10% correction in the market, so we don’t believe in panicking when the markets take a dip. But we don’t know when, or how long, or how deep a periodic correction will be.

They say that even a broken clock is right twice a day. Market timing often feels the same. Even if you have a deeply held conviction that a market is due for a move, you may have to wait an unpleasantly long time before you turn out to be right. In hindsight market moves seem obvious, and it is tempting to look back and curse having missed the opportunity to sell at a top or buy in at a bottom. But at the time, nobody knew that they were at the top or the bottom. If we could accurately predict when the top or bottom would hit, we wouldn’t be here dispensing financial advice. We’d be sitting on a beach somewhere in the tropics, having rum runners dispensed to us.

Maybe someday we’ll get a better crystal ball that can make those predictions. Until then, we’ll just settle for getting rich the slow way and leave market timing to the gamblers and bookies.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Don’t Let Your Anchor Drown You

© Can Stock Photo Inc. / dubassy

When the market has been volatile and seems to be trending lower and account values are shrinking, we frequently look back to the high point, and shiver at the loss since that time. Some clients have told us what their accounts were once worth, and what they are worth now, in order to get across how the losses are affecting them. It is not good fun for anyone. Behavioral economists refer to the first number in those comparisons as the “anchor.”

Since the beginning of 1950, using the S&P 500 Stock Index as a proxy for the broad stock market, there have been 16,630 trading days. On just 1,175 of those days was the market trading at a new high—about one day out of 14. On the other 15,455 days, one could have bemoaned the “loss” from the prior peak. In other words, 93% of the time, one could say money had been lost.1

But in this same period, the S&P rose from 16 to 1,880!1 Does it really make sense to say we were losing money 93% of the time, when we ended up with 117 times what we started with? We think the final destination is far more important than the ride we took to get there.

Of course, this time feels different. Mainly because it is here, right now, in our faces. And for some fraction of that 93% of the time, the change from the prior peak was just a little bit. So we went back and figured out what part of the time the market was down more than 10% from its prior peak—in ‘correction’ territory, as the gurus would say.

Surprisingly, the market was in correction territory, down more than 10%, on 6,372 days—right at 38% of the time or about three days out of every eight.1 A lot of misery was endured (or ignored) on the way to that 117-fold gain.

So thinking about the broad market, the S&P 500 Index, it might not be appropriate to anchor to the 16 point reading back in 1950. That was a long time ago, after all. 1960, at 55 points, might also be too far back. The right anchor, depending on your age and length of investment experience, might be the 80 points in 1970, or the 120 point level reached in 1980, 350 points in 1990, or the 1400 point level from the year 2000. The anchor that could drown you is that last high point—2130 points in May of 2015.

In Outcomes May Vary we wrote about the consequences of selling out at low points. Usually, those who do so are anchored to the last peak, focusing on paper losses. That is why we are encouraging thoughtfulness is choosing anchors. Write or call if you would like to discuss your situation.

1. Original research, based on analysis of historical records of Standard & Poor’s 500 Index.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Weighing the Bad and the Good

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If a salesman came up to you on the street and offered you an investment that had only a 54% chance of making money, would you think it was a good bargain? Probably not.

Over the past 65 years the S&P 500 index has had a positive daily return less than 54%. With odds like that, one might think that some skepticism in stock investments was warranted. And yet, over the course of those 65 years, the S&P has risen over 12,000%. Even though it has lost money almost half the time, taking that 54% bet over and over again turned out to be very profitable. At times, market movements feel like they’re going one step forward, one step back—or at times even one step forward, two steps back. But over time, stepping forward 54% of the time is enough to build a great track record.

Past performance is certainly no guarantee of future results. We can only hope that the next 65 years are as good for the market as the past 65. The potential is there, though. And obviously, market volatility does pose obstacles. If you have $10,000 today and you really, really need to make sure you have $10,000 tomorrow, investing in a market that goes down 46% of all trading days is not a very good idea. Investing in volatile markets takes a certain mindset and a longer term investment timeframe. Call or visit us to discuss what investments would be suitable for you.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Ever Notice It Goes “Day-Night, Day-Night, Day-Night”?

Sun setting over the Gulf of Mexico

A long time ago, a toddler posed me the above question. Surprised, I said “What?” and she replied, “The world!” The innocent quest of a three-year-old to observe and understand the world as it is contains a vital lesson for investors. The corresponding question for investors, one that deals with the most basic aspect of the economic and business world and the investment markets, is “Ever notice that it goes up-down, up-down, up-down?”

Cycles and volatility are every bit as central to the investing world as night and day are to the physical world. When the sun sets, we know better than to panic about whether it will ever rise again. When the markets turn downwards it is equally fruitless to worry that they are going to stay down forever.

It is important to have the wisdom to recognize that markets don’t go up forever, either. Investors are lured into bubbles by the notion that the good times are here to stay. How many people did you hear saying “You can’t lose money in real estate” in 2007, or “You can’t lose money in tech stocks” in 2000? They might as well have been saying that the sun will never set.

We know that the market goes up-down, up-down, up-down. While markets may not be as reliable as the sun, we believe that over the long run we can see more “up” than “down.” Part of this is knowing enough to avoid stampedes when everyone else is convinced that a market can only go up-up-up or down-down-down.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Investing involves risk including loss of principal.