I Had a Dream

In honor of “Throwback Thursday” I am revisiting an article we published on 01/22/19, as the market plunged into the abyss the prior month based on perceived Fed policy mistakes at the time. I believe the content is relevant today and offers lessons on how to manage the current situation.

I Had a Dream

I had a dream. With US stocks suffering their worst December since the Great Depression (the original one back in the 1930s, not version 2.0 Light from 2007–2009), all major US indices for all intents and purposes having plunged into bear market territory earlier that day, I dreamed of the DOW having a 3,000 point move in less than 20 short trading days. I dreamed of the VIX, the Fear Index, experiencing a massive 50%+ change. I dreamed of headlines proclaiming the government being shut down for the longest period in history, and pundits blaring how our President allegedly instructed others to lie to congress, a potentially smoking gun and impeachable offense.

Upon waking, I shared this dream with a close friend. “I had the very same dream!” he proclaimed with anxiety resonating in his voice in sharp contrast to the peaceful day of Christmas before us. “It was a total nightmare! I just left a message for my broker to sell all my stock in my retirement account. I can’t take this anymore! This is the uber-crash I’ve been predicting for years.” I didn’t have the heart to tell him I interpreted my dream quite differently…

And here we are, less than a month later. DOW hit a nadir of around 21,800 on December 24th, and sits around 24,660 as of this writing, a nearly 3,000 point rise. VIX has cratered to about 17.8, down from around 30 in December. US stocks are having their best start of the year in over three decades. And the government is still partially shut down and….well you can read the rest of the headlines.

To quote the great Warren Buffett, “The stock market is a device for transferring money from the impatient to the patient.”

There were plenty of impatient investors in December as record mutual fund outflows (as in panic-induced sales) were occurring weekly. Pieces of businesses simply changing hands from the impatient to the patient, with the former being poorer for the likely short-term, emotions-based action, and the latter being richer for their discipline and fortitude. We learned in 2008/2009 when the market plunged, rallied, and declined again, bear markets are rarely straight down and up. Where we go from here in the near term nobody knows. But many of those investors who were happy to sell their shares 3,000 DOW points lower are likely getting back in the market now that they ‘feel good’ again (which is not the ideal time to buy or hold – it should feel very uncomfortable holding when the market is declining, just as it is not exactly comfortable running 6 miles, but it sure is good for you). Rarely do investors sell low and buy back in even lower.

In a world full of hyperbole, spin and ‘alternative facts’ it is important to look at real data. Let’s take the popular NASDAQ (QQQ). It experienced a bull market which lasted around 3,000 days. Then within 30 trading days it hit bear market territory (decline of 20% or more). Within a few trading days after that, it exploded to the upside, rocketing over 15% from its lows in under a month. During those 3,000 bull market trading days, it went through plenty of corrections (more than 10% but less than 20% decline). Despite thousands upon thousands of so-called experts predicting the next bear market from around 2010 onward, no such bear market occurred for another 9 years. 3,000 days in a bull market, many 10% corrections lasting short periods during those 3,000 days, around 30 days (or 1% of the bull market duration) to go from bull to bear, followed by few weeks to rocket back up from there. Remind me again how you are going to time the market, other than of course after the fact?

This recent episode reminds us once again of the folly of trying to time markets. As we emphasize here at Coastwise, time your cash needs. If your assets are properly allocated and match your investment time horizon, you don’t need to attempt the impossible of predicting short-term price movements because you are already prepared, at least financially, for the inevitable by having enough money to take care of your short-term cash needs and enough time to ride out bear markets for your medium to long term needs. You have pre-emptively mitigated stock market risk. If you have a solid allocation plan in place but find yourself emotionally susceptible to taking actions likely against your long-term financial interests, then add metrics to review above and beyond stock price to give you solace and comfort to weather the storm. Here is a key one: S&P 500 companies increased their dividends in aggregate around 9% in 2018. While prices temporarily fell, those who own dividend stocks got a pay raise. Put one of your holdings’ ticker symbols into Google along with the words “dividend increase history” and see what pops up. If you see a chart with consistent, steady rises, that may give you comfort that an important part of your profit expectations / needs will be met through this source.

Or better yet, put your phone away, turn off the news, and go live a richer life with friends and family and ignore the near-term market ups and downs.

As the saying goes, history does not repeat itself but often rhymes. Learn from the past to improve your future. We are here to discuss and assist with your specific circumstances.