It’s been a crazy week for the markets, both here and overseas. The Fed apparently wasn’t aggressive enough for investors, which started the selling that was accelerated by Trump’s decision to slap China with tariffs on September 1st to the tune of 10%, and if that wasn’t enough to freak the market out, China decided to manipulate the value of their currency in retaliation. All of that, and here we are on Friday, with stocks teetering on a potentially positive week… go figure!
I’m often asked if I ever worry about the market changing to the point where our trend-following strategy won’t work anymore and I always provide the same answer:
“The reason trend-following works in the market is because the market’s moves are the result of human behavior. So in order for the market to ‘change,’ human behavior would have to change, and I never see that happening.”
Humans are not good investors because we’re too emotional, and mixing emotions with money is like mixing hot sauce with peanut butter (something I honestly considered during a conversation with my bride and boys this past week). I love peanut butter – and I love hot sauce – but I have a feeling the two have no place on a plate together.
The point is, in order to be a good investor, you have to start with a philosophy, create a retirement plan for yourself, design an investment strategy around rules that you’ve tested, and the rest is simple:
If you don’t have the time or interest in determining your philosophy, creating a plan, and designing an investment management strategy, then you should interview a few firms and hire a professional to do it for you.
When a doctor performs surgery in the trauma room, the he/she will not be distracted by a pan that falls and loudly hits the ground, a newfound artery that’s causing a surprise internal hemorrhage, or the sound of a second patient being rushed in via life flight into the trauma room next door that will require his/her attention immediately following his current task.
The same can be said for professionals in the retirement planning and investment management world. We diagnose financial problems and perform surgery to correct those issues. When (inevitably) the market gets crazy and the news starts blaring, we’re here to hold your hand when you’re preparing to inadvertently and unknowingly hurt yourself.
Humans hurt themselves financially because they’re fearful. They can’t tell the difference between reality and the mirage. You may have heard the acronym for the word:
Roughly 25% of the time, investors should be afraid and they should take action in their retirement portfolios, but the fact is, most people don’t know when or what to do. The other 75% of the time, however, the acronym above holds true and there’s really nothing to be afraid of. Again, in those times (and today, I’ll say “in these times”), our job is to ensure you’re staying on the road and headed in the right direction.
Since the market last bottomed after the 2007-09 crash, there have been five times in 10 years (see the vertical red, dotted lines in the chart below) when tornado sirens were going off, it made sense to head to the basement and sell your stocks to avoid getting obliterated by a tornado. Now, in all five of these circumstances, the tornado never showed up… but does that mean you should ignore the sirens next time?
In addition, notice all the reasons to sell, above. There’s always something to be afraid of, isn’t there?!
However, we need to discern reality from the mirage. Is this new trade war talk, the new tariffs, and Yuan manipulation a reason to sell?
No… at least, not yet.
And just because it’s possible that things could get worse doesn’t mean that you should sell in anticipation of something bad happening. Again, you should have rules, and when the big “sell signal” in your book of rules triggers, that’s when you sell, and no sooner…
…because after all, you could be wrong, and then what are you going to do? When do you get back in? As a fellow technician and legend in the investment world titled his most recent book, “When the time comes to buy, you won’t want to.”
Again, it’s human emotion that gets in our way and creates failure in our retirement portfolios.
The market falls by roughly -5% roughly three times-per-year, on average. The most recent drop this past week marks the 2nd time it happened in 2019. Should we be afraid?
When you get in your car to go on a long road trip or vacation, and you punch in the address into a GPS, you generally follow the route guidance with rare exceptions (stopping for gas, food, or bathroom breaks). There can be times of heavy rain when you might want to slow down dramatically and take less risk, white-out conditions that might justify pulling over to the side of the road, or tornadoes that force you to get out of the car and hunker down in a ditch or under a bridge.
This is not one of those times… but if you don’t follow your GPS (retirement and investment plan), and keep going off course, getting distracted by clouds, continually stopping the car or unnecessarily slowing down, you’ll never get to (or through) retirement like you hope to.
When real clouds come and there’s danger on the horizon, we’ll always take the appropriate measures to manage risk because we have our rules in place that have been tested, tweaked, re-tested each year, and by following these rules, we eliminate emotion and rightfully ignore the noise when it just doesn’t matter.
Till next time…
AdamCategories: Adam Koos, CFP®, CMT®, Market Commentary