In December of last year Trump targeted Boeing (BA) in a twitter storm. The stock promptly fell a percent or so, only to become one of the best performing stocks in the DOW for 2017, rising over 53% year to date, thus proving once again fundamentals trump headlines any day (or more specifically, over many days).
Despite all the turbulence out of Washington, in the media, and beyond, it has actually been very smooth sailing for the US stock market thus far in 2017. A key measure of market volatility, the VIX, has been hitting multi-decade lows (under 10, compared to over 80 during the financial crisis of 2008/2009, and a long-term average of around 20) which seems in stark contrast to the never-ending rankling in our political system.
But getting lulled to sleep, to letting down one’s guard, is a dangerous thing in fighting as well as investing. Recent market declines and gyrations, while seemingly large compared to the calms we’ve been experiencing the last several years, are nothing relative to norms, let alone more dramatic swings we experienced less than a decade ago. While the ultimate defense against temporary price declines is to have the appropriate allocation of assets – cash, short-duration bonds, etc. for near-term needs, stocks for capital you don’t need for 3-5 years or more, it is important to be mentally & emotionally prepared for the real possibility that more extreme volatility returns to the market.
In the realm of spirituality, the Dalai Lama counsels that all creatures suffer, that it is a natural part of life, and that rather than avoid it, you are better served emotionally, spiritually, and practically to accept it, even anticipate it. In the same vein, rather than pretending that it will be ‘different this time’ or that you really don’t want to think about the possibility of your stocks declining 20% or more in the near term, you would be well served to preemptively consider such a scenario. Discuss it with your partner, your Financial Advisor, and/or a wise friend. Often addressing challenging issues head on, while scary going into the exercise, ultimately gives us a sense of confidence and equanimity.
Specifically, as counseled consistently over time in this newsletter, if you have cash/expense needs in the next 1–3 years, consider moving some stock gains into shorter-term instruments like cash or short-term bonds. At a minimum, consider taking partial profits on stock positions and/or hedge. For capital not needed for approximately 3 years or more, review your internal risk tolerance (read: emotional fortitude) around riding out the storm. The time to contemplate, to plan, is in a moment of calm, not in the middle of a panic, as when the storm finally hits your emotions will take over unless you have worked with your professional to preordain a plan in anticipation of various likely scenarios. By reviewing how long bear markets take to come and go based on objective, historical data, it will give you comfort and increase the chances you will not take emotions-based actions at just the wrong time.
As always we are here to discuss your particulars and offer a review of your unique circumstances.