You can almost hear the eerie horror film soundtrack behind the commentary coming out of the financial pornography outlets. The tension in the air is palpable. The narrative is simple and scary:
Stock Market Volatility has returned. Investors are worried. The DOW 30 went up the first eight months of the year. Since mid-September, it’s given it all back. Broader markets like the S&P 500 are red for the year and smaller caps and foreign stocks are in bear market territory (more than 10% down) … and the daily charts have looked darn right ugly at times.
IT ONLY LOOKS DIFFERENT
What we have seen the past several weeks is actually nothing new. Stock market corrections happen all the time. If anything, the past 18 months have been the historically unusual event, but because most people were making money, nobody said anything.
It just seems new and scary now. Placed against a fairy-tale back-drop where nothing bad happens, three down weeks in a row is quite alarming.
Our brains are wired to take the recent past and extrapolate that experience into the far-flung future. It’s actually one of our better traits that has served the human species well over the past 30,000 years.
Unfortunately, this predisposition to short term trends doesn’t serve people so well in the world of investing … as you’re just starting to rediscover now.
Bernanke, Yellen, the Fed and their complicit partners in the financial services world lulled you into a very deep sleep – practically a coma. QE may have done nothing for the economy, but it put stock prices on a nice, smooth rocket ride upward.
For years, I have been telling people (here, on the radio and in live presentations) to always pay attention to downside risk. Not all portfolios are built the same. There ARE ways to build and manage an investment account that goes up when the market goes up but also limits draw downs when the market takes a breather (or a beating as may be the case today).
Have people listened? A few, but for the most part the message has fallen on deaf ears.
Since late 2011, everybody who was invested in the stock market has looked like a genius. The rising tide floats all boats and the Fed has been pumping liquidity into the system at a previously unheard of rate. The stock market partied and the gains were quick. Short sighted investors couldn’t see the need to manage for downside risk.
But the tide is no longer rising. Quantitative Easing is officially over, all the “unplugged holes” in the system are leaking and the tide is going out … quickly.
NOT TOO LATE
Every five to seven years, the market goes through a serious correction (20% or more). The last big one was in 2008 so we’re about due. Right now we’re 5-10% off the peak (which was just last month) so there is still plenty of downside potential.
Considering the unprecedented size and scale of the liquidity injections that led us here (by the Fed through QE), a more serious than usual correction is not out of the question. If that were to take place, 5-10% losses so far would seem like a gift compared to riding this one all the way to the bottom.
I DO NOT recommend that people sell everything in a panic and go to cash. A good investment strategy always has upside potential built in … and cash has very little upside, especially today with money market accounts paying 0.01%. There are, however, ways to build a portfolio that can capture potential upside AND limit the draw downs before a down draft becomes a disaster. I’ll save the discussion of whether or not you can do this yourself for another post.
At the very least, wouldn’t you like to know how much downside is built into your portfolio?
We can do that analysis and (at least for now) it won’t cost you anything more than about 30 minutes of your life. Get started here.
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