Lance Alston

You probably noticed that US equity markets did not celebrate the Philadelphia Eagle’s Super Bowl win on Monday.  In fact, it was the worst one-day point drop in history for both the S&P 500 and the Dow Industrial Average.  (see #1 below)

We may be nearing that tipping point where the common discussion goes from “why can’t we have more stocks, I hate bonds” to “why do we own stocks at all”?  The short answer is that we own both, all of the time, because you just never know where markets are heading in the short-run. (see #2 below)

I must warn you the rest of this post will have almost nothing to do with economics, market predictions, historical trends, or recommended portfolio changes.  Nope, none.  Now is the time to focus on investor behavior, not markets.

Take a deep breath and repeat as needed – “even after Monday’s drop, the S&P is still up 10% since September and has almost doubled in the last 5 years.”   

Your portfolio is still okay.  Your financial plan is still okay.  Your retirement and future dreams are still okay.*  Are you okay?  (see #3 below)

Remember, you have stocks in your portfolio because they go up much faster than inflation in the long run.  You have bonds in your portfolio because people really, really hate to lose money, and they plan on spending some of that money in retirement.  Bonds don’t typically don’t lose money if they are high quality and short-term.  (For example, none of the taxable DFA bond funds lost value on Monday, while stocks were losing 4%.)

If you are concerned about the markets, give your advisor a call.  If you want to check in and get some reassurance, give your advisor a call.  If you want to know exactly how much you have invested in stocks…you get the idea.   

Tiffany and I have been talking about the coming market correction for quite a while.   We might be there, and yet, we might not.  1998 saw five down days greater than 3% for the S&P 500 and still gained more than 28% for the year.  In truth, no one knows where the market is heading in the short term. 

#1 –  Don’t confuse a point change with a percentage change.  Sure it was the worst point drop in history, but that’s because we are at ALL TIME HIGHS!  On a percentage basis, the market drop yesterday was not exceptional.  On average, we have had 2% declines in the S&P 500 every 37 trading days; 3% drops every 131 days; and 4% drops every 303 days – or slightly less than once each year since 1970.

#2 – Our expectations are often influenced by recent experiences, i.e. recency bias.  We forget stocks can go down while we’re in a bull market, and we “misremember” that they eventually can go up during a bear market.

#3 – Quick check up –  has your personal situation changed?  Is there any reason to believe your assumptions are unrealistic?  Do you have sufficient emergency cash and at least 5 years of portfolio withdrawals in bonds?  The natural tendency is to “do something” when markets correct.  A successful financial plan shouldn’t require a response to changing markets – those fluctuations are already assumed in your plan.  Doing nothing is your best option.

* I’m assuming you have a written financial plan that is up-to-date.  If you don’t, there’s no way to tell if your portfolio or your retirement are “okay”.  Now is probably a good time to give your financial world some attention. 

 

• Past performance does not predict future returns.  Always read the prospectus before investing.

Winter finally arrived recently in North Texas. Our high temperature today is expected to be 25 degrees, with a low in the mid-teens. We haven’t seen cold weather like this in 362 days!

My friends up north assure me you get used to the cold weather, but down here in Texas that can be challenging – our high temperature last year on January 2nd was 69 degrees. Just this morning my youngest daughter strolled downstairs wearing shorts and a t-shirt. I guess she hadn’t heard the howling wind or noticed the blue grey skies outside. It didn’t take long before she was back upstairs looking for her jeans and a sweater.

We knew this day was coming. It happens about this time every year. Fall’s end and winter’s beginning shouldn’t be a surprise to anyone. No one frets too much about the seasons and we all know exactly what to do when they change.

Why are we so adaptable when it comes to the changing seasons, yet terrified of the next bear market for stocks? Just like the seasons, bull and bear markets come and go. We cannot control them or predict the day to day market fluctuations any better than we can accurately predict the weather more than a few days in advance. Yet we know with a good deal of certainty that every soaring market must eventually fall. Risk and return are connected, remember.

We are now at 24 months and counting without a 10% market correction. Global markets have seen double digit growth, economic data seem encouraging and interest rates remain relatively low. This market feels like the warm, comfortable days of summer. And like every summer before the last one, it will end.

My advice is to treat the next bear market like you treat the changing seasons. Be prepared of course, but don’t be surprised or stressed by the change. A market correction of 10% is as normal as the annual fall foliage or January ice in North Texas. In fact, one survey suggests corrections occur every 357 days on average. That means we’re more than 12 months overdue.

Stay warm.