Trade In Your Crystal Ball for a Time Machine

Trade In Your Crystal Ball for a Time Machine

June 20, 2023

As discussed in last month’s newsletter, rather than dusting off your crystal ball to make macro-economic and political headline predictions and their impact on short-term stock market moves, you may instead want to fire up your time machine.

Turn the dial back just a few months to the week before Christmas 2022 and you will be reminded of all the red ink flowing from the markets.  At the time, given the usual rear view mirror commentating and prognosticating, most financial pundits were predicting more hard times ahead with tech stocks headed towards one of their worst years on record.  But as always, money can be made (and lost) in challenging times.  As Buffett says, the stock market is a vehicle for transferring money from the impatient to the patient.


I counselled on December 21st to stay the course, noting that, “…historical data indicates that after periods of declines like we have experienced this year, the market is materially higher 5 years (by 148.8% on average), 3 years (by 82.0% on average), and even 1 year (by 51.1% on average) later. This is based on S&P 500 trough to peak performance data from 1950 to present for market declines of 20% or more and subsequent recoveries.”


Fast forward to today, and SPY exited bear market territory after 248 trading days which was the 2nd longest on record since 1948.  The average bear market peak to trough to recovery lasts 142 trading days.  The average bear market from trough to exit is 61 trading days.  Read that again – 61 trading days from lows to recovery.  That’s your kids summer vacation.  Since its low in December of last year (less than 6 months ago) the NASDAQ has rebounded over 40%.  If you sold stock in a moment of panic last year – or with the goal of getting back in once things became ‘clear’ (hint, the stock market, let alone life, is never ‘clear’) - you are likely regretting your actions.


The reality is, while bear markets at the time seem to last forever, they actually come and go fairly quickly.  So, trade up your crystal ball for a time machine, and tell your 1987, 2001, 2008-2009, 2020, or 2022 self that it is going to be OK, to at a minimum relax and be patient, or at best to add to your core positions.  And the next time the market drops materially – and it will – hopefully your future self will have learned the lesson not to panic, to instead focus on high quality holdings, to reinvest those dividends, and to be there for the inevitable rebound.

By matching your assets (types of investments) with your liabilities (future needs) – something Silicon Valley Bank learned the hard way is risk management 101 - then it will be much easier to be patient and stay the course when the next bear market arrives.  Under this scenario, you will have your near-term needs covered by existing cash/short-term fixed income and / or cash flow and will have no need – and less temptation – to sell your long-term assets (AKA stocks) that you will need for liabilities two, three, five, or 10 plus years down the road.


If you know yourself well and feel you do not have the fortitude to stay the course when markets experience turmoil, then consider working with someone who can stay objective and disciplined as they can save you from making hard to repair financial mistakes and give you peace of mind amid the storm.