In Bulls, Bears, Corrections and Crashes, Part 1 we examined the differences in various market stages. Part 2 is about putting together your to do lists.
The Dow Jones Industrial Averages (DJIA) set 70 record highs in 2017. Things were cookin’! The new year got off to a great start and the DJIA closed at 26,616 on January 26, 2018. Then the waters got choppy, and by Christmas Eve, 2018 we were poking the bear. All the major market indices were significantly down, and the DJIA closed at 21,792. That’s about an 18% drop from 26,616. More than a simple correction, just shy of a crash. Today, about 21 months later, we are sitting nearly 1000 points above the January 2018 high.
Here are a few takeaways: Markets move without consulting us first, amateurs and professionals alike are routinely taken by surprise, markets have always been self-repairing and have always come back to reward long term investors, and volatility, while often terrifying, is the very thing that allows us to make money in the markets. No moves, no money.
So what am I supposed to do?
It’s easy to say “stay the course,” and “stick to the plan” when markets are climbing. You’re making money, you feel like the master of your universe. You are a freakin” genius!
And then that day arrives.
Markets take a not-so-expected dive. It looks serious. Financial news people adopt somber tones and church voices. CNBC is bursting with photos and footage of floor traders holding their heads in front of red screens and swigging Maalox and Jim Beam cocktails. The inevitable comparisons to the 1929 crash start to appear.
You already know every one of these things happen. Routinely. But just like hyperbolic winter weather reporting that causes throngs of anxious people to empty out Costco’s toilet paper supply, apocalyptic financial forecasts rarely help anyone.
You need to learn the difference between a healthy, welcome correction and a truly sick market, and then gauge your reactions accordingly. But, no matter how good or smart you feel, markets can crash. The markets can turn into long term bears. Things can get really bad. We’ve seen that movie before.
What is important to note is that when things got really bad in the past, things eventually turned around. Business production starts to climb again. People start to buy things again. People climb out of the doldrums and become confident again.
Things turn around. It has always happened that way.
We never know when it will happen. We never know how bad it will be. We never know how long it will last, but if you’re 35, you’re gonna be ok. If you are 75, well, it all depends on how your retirement allocation was set, how little risk and equity exposure you have, and how strong and dependable your income sources are.
Your list of things to do should be based largely on your age, the amount of risk you can take based on your age, and how your current financial position stacks up.
You should work with a professional fiduciary to discuss the factors and parameters that are unique to you and your plan, but here are some basic rules that may apply in most situations.
DON’T: Vacate the market completely.
It’s scary out there sometimes, but daily market moves are largely meaningless. Red Arrow-Green Arrow wars make for good TV, but you have to view markets in long cycles.
Look at this chart from a nervous couple of weeks, December 21, 2018 through January 4, 2019.
Chart: Dow Jones Market Data
Now look at this chart from 1960 through August 23, 2019.
Poof! Like magic, the treachery of the first chart almost disappears!
Long term investing is not as exhilarating as day trading, but it is THE proven strategy
DO: Selectively take profits and reallocate assets or raise cash.
Selling off some winners and spreading around the profits to bolster a few quality positions that are down in value is a solid strategy.
For instance, if your initial portfolio allocation starts with a baseline allocation of 20% in each of five ETFs, each having a different job to do in the portfolio, and all selected with your risk tolerance and required return ranges in mind, your allocation looks like this:
ABC-20%, BCD-20%, CDE-20%, DEF20% and EFG-20% (100%).
But because of market activity in the past quarter, or year, the new allocation turns into this:
ABC-17%, BCD-20%, CDE-23%, DEF-20% and EFG-20% (100%).
BCD, DEF and EFG didn’t budge, but ABC lost ground, and CDE climbed. This is a reality in almost all portfolios since asset classes move differently from one another. When some are up, others are down.
Because of this paper loss you may be inclined to dump ABC because it dropped 25% in value. The first question to ask is,”why?” If your research shows that the drop was due to a temporary market repricing, and the position still presents solid upside for the future, most investors would do well to take some profits by selling as much CDE required to bring the allocation back to a 20% allocation, and reinvest those profits into ABC, to reestablish its 20% allocation.
At times, it may be wise to take profits solely to increase your cash position if a recession is looming and is likely to affect all asset classes.
In either case, you would be wise to work with an experienced professional whose practice includes asset allocation. allocation
DON’T: Market timing.
It does not work. Don’t do it. It makes things worse. If an investor decides to do a total cash out and then get back in when the market improves, they will surely miss some of the markets biggest gain days on the way back up while they sit in cash. And how does one know the right day to get back in? Good luck with that.
A quote from iconic investor Peter Lynch sums it up pretty well: “I can’t recall ever once having seen the name of a market timer on Forbes‘ annual list of the richest people in the world. If it were truly possible to predict corrections, you’d think somebody would have made billions by doing it.”
DO: It’s about time IN, not timING.
Markets move through cycles, and positive returns require time and participation to compound. Let the other guy sell and time. Tune up your allocation, focus on risk management, stay invested and look for bargains after the crashes and corrections.
DON’T: Go it alone.
The modern pop culture of the 1990’s painted investors as cowboys (and girls) out on the wild frontier with a mouse in one hand and a wad of cash in the other, manically and desperately anxious to find that “twenty bagger” (making twenty times their wager overnight) with a .com handle.
I think that was the first time the term “bubble” was openly discussed as a possible outcome, and I still call the lost dollars as “tuition.”
Inexperienced do-it-yourselfers paid a lot of tuition. Some of them didn’t learn a thing.
DO: Work with a professional fiduciary like a Certified Financial Planner.
It’s a paradox: Investing has never seemed so complex, yet the answer to successful long term investing has never been simpler. But even the simplest strategies may seem confusing or difficult when so many variables are in play. Age, time, risk, taxes, liquidity requirements, income needs, diversification…all play into each single decision you make.
A qualified fiduciary will help you simplify even the most complex issues, and help you determine the best financial strategies for your situation.
For more ideas go to: It’s called the business CYCLE for a reason!
Originally posted November 4, 2019, this perspective is just as relevant today, as we face the economic uncertainty and health fears brought on by the COVID-19 pandemic.