As of this writing, the S&P500 is up 3.8% YTD and is only about 1.4% off of its all-time high. Never before have we seen such a precipitous drop and recovery in such a short time frame. In 33 days, from February 20th (the S&P500’s all-time high) to March 23rd (the most recent low), the S&P500 fell a staggering 34%. Keep in mind it took 17 months (from October 2007 to March 2009) for the S&P500 to fall 57% during the financial crisis.
Now that we are seemingly across the valley, I thought it would be a good time to discuss fear and focus. Let’s start with fear:
As humans, our lizard brains are hard wired to react to fear. That instinct is what has allowed us to survive as a species and be rewarded through out our evolution. However, when it comes to investing, fear does not serve us well and in fact is our worst enemy. Fear can blind you to the fact that all declines in the market are temporary and at some point, give way to the permanent advances of both equity prices and their dividends. As has been said many times, the four most dangerous words in investing are “This Time It’s Different”.
With history as our guide, there has never been a time when a broadly diversified portfolio suffered permanent loss. That is very different than saying an individual investor hasn’t suffered permanent loss. You may even know of someone this has happened to but notice it wasn’t the “markets” fault. All the blame lies squarely with the actions of the investor. As your advisor, nay, behavioral coach, my most important role is to keep you safe from yourself. And Congratulations! We didn’t have anyone “cash out”. Many of you will also remember me calling you to try to get you to put cash to work in late March. The one’s who did have been richly rewarded which brings me to my next point: Focus.
Like Wayne Gretzky famously said, “Don’t skate to where the puck is, skate to where it is going”. Unlike anything else we are consuming, when the market goes down, we perceive it to have less intrinsic value (even worse, when the market goes up we actually perceive it to have more intrinsic value, but I digress). Wouldn’t it be silly if you were wanting to buy a car that costs $50,000 but for some reason it went on sale for 34% off, or $33,000, and you didn’t jump on the opportunity? That’s how I view bear markets and I would encourage you to do the same.
If you did miss out on the last fire sale, take heart. The market has a roughly 30% off sale every 5 to 6 years so you’ll get another opportunity (however most likely not at the price point of the bargain lows we just experienced).
As always it is a pleasure and an honor to server as your advisor and if you would like to discuss anything, or just want to chat with someone, please do not hesitate to give me a call.
David R Henderson