As I write this on January 19, 2016, the stock market ended 2015 and began 2016 on a dreary note, declining 10-12% in value. This is a market correction, the type of market condition that I’ve written about in several recent newsletters and in my 2013 book, The Serious Money Train (from which I will take the liberty of quoting freely). At this point in the cycle, we don’t yet know if this correction will remain a correction or decline further and become a full-fledged Bear Market.
If you think of your lifetime investing journey as a long, cross-country train ride from Los Angeles to New York, then parts of the journey necessarily have to navigate the eastern slopes of mountain ranges. This part of the ride can be unsettling, because of downhill speed, unprotected curves and dark tunnels. But knowing that the mountain range ends and the track eventually levels off helps mitigate the fear. The correction phase of every investment cycle is similarly unnerving, but the concerns of many investors are compounded by the additional fear that there is no bottom.
Hopefully, we are viewing this part of the market cycle differently. Those of us with cash to invest are relishing these lower prices. The rest of us hopefully understand and accept that corrections and/or Bear Markets serve an important purpose and are necessary to acquire future profits.
Bear Markets are traditionally defined as a drop of 20% or more from any peak price. Their inevitability is as elementary as acknowledging that nothing goes up forever, including the prices of businesses. They must top out at some point when optimism and euphoria give way to the reality that the businesses are over-priced and can no longer be bought with the expectation of a nice future profit. When this happens, there are fewer buyers and sellers must drop their price if they want to turn their shares into cash. Usually it doesn’t take a 20% drop in price — but something less — to attract buyers back into the market.
Watching the value of your investments decline is disappointing, frustrating and terrifying, all the more so if you fear that the decline will never end. But this is where we have an edge (The Planner’s Edge, if you will): we know and believe that the Bear cycle will end… because they always have. We know it’s okay to be alarmed, but not okay to act out of fear. We also know that the proper strategy is to wait it out because this is the surest way to be fully invested when the Bear cycle reverses itself and becomes the next Bull cycle.
The knowledge that every one of the 14 Bear Markets since WWII eventually ended has taught me three important lessons:
- First, corrections and Bear Markets do end;
- Second, declines are therefore always temporary; and
- Third, the proper strategy is to remain fully invested.
Often, however, one fears that “this time is different,” and perhaps this market correction won’t end the way others have ended. This is when I think of the quote from one my favorite market thinkers, Nick Murray:
“A Bear Market is when investors who think this time is different sell their common stocks at panic prices to investors who think this time is never different.”
Jeffrey Ross
Registered Investment Advisor
The Planner’s Edge
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As a Registered Investment Advisor, one of our responsibilities is to communicate with clients in an open and direct manner. Insofar as some of our opinions and comments are based on current advisor expectations, they are considered “forward-looking statements” which may or may not be accurate over the long term. While we believe we have a reasonable basis for our comments and we have confidence in our opinions, actual results may differ materially from those we anticipate. You can identify forward-looking statements by words such as “believe,” “expect,” “may,” “anticipate,” and other similar expressions when discussing prospects for particular events and/or the markets, generally. We cannot, however, assure future results and disclaim any obligation to update or alter any forward-looking statements, whether as a result of new information, future events, or otherwise. Further, information provided in this letter should not be construed as a recommendation to purchase or sell any particular security.
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