More Perspectives on Market Events and Volatility

With all the volatility in the stock market we are concentrating this newsletter on the markets but that is not the only financial activity that people have. Large purchases are also important.  Rich’s expert advice was sought in avoiding being taken when financing an automobile.  For most people purchasing an automobile is the second largest purchase after their home.  Below is the link to that article for those of you who are interested.
For those of you more interested in the market gyrations here is our article concerning the current volatility:
Last week and this week, we experienced lively U.S. stock market movements that happen, on average, about once a year; a 10+% percent drop is the definition of a market correction. The last time this correction happened was a whopper, the Great Recession decline that caused U.S. stocks to drop more than 50%. Past stressful experiences cause great fear in present day interruptions. People get caught in fear, do not take the opportunity to understand the market systems and declare market corrections as catastrophic with an embodied imprint. These imprints of catastrophe will remain a repeating fear catastrophe if we do not examine them with a broader perspective and awareness. Let’s examine this one and relieve ourselves of catastrophic fear imprints. In reality, market movement is not a catastrophe, our beliefs (and history) about them cause us discomfort, uncertainty and fear. More typically, these movements last anywhere from 20 trading days (the 1997 correction was down 10.8%) to 104 days (the 2002-2003 correction was down 14.7%). Corrections are unnerving, but they are a healthy part of the economy, for a few reasons.
First, because corrections happen so frequently and are so unnerving to the average investor, they “force” the stock market to be more generous than alternative investments. People buy stocks at earnings multiples which are designed to generate average future returns considerably higher than, say, cash or fixed income investments like municipal bonds; investors require that “risk premium” (which is what economists call it) to get on that ride. In other words, if you’re going to take more risk, you should expect the opportunity to get considerably more reward.
Second, because the stock market roller coaster is too unsettling for some investors, they sell their holdings when they experience a market lurch. This action gives long-term investors a valuable opportunity to buy stocks on sale. That new purchase of lower priced stocks will lower the average cost of the stocks in a portfolio, which can be a boost to long-term returns.
Third, the lurches of the stock market allow investors to “buy back in” – reset the investment horizon and review investments to determine whether their holdings are compatible and current with their risk tolerance and investment objectives.   When the market is reaching new highs and the value of portfolios is rising… few people diligently review their asset allocation and adjust it to match their objectives, time horizon and risk tolerance. However, that is often the analysis performed once a correction hits their portfolio.
The market downturn relates directly to the first reason, where you can see that bonds and stocks are always competing with each other. Monday’s 4.1% decline in the S&P 500 coincided with an equally remarkable rise in the yields on U.S. Treasury bonds. Treasuries with a 10-year maturity are now providing yields of 2.85%, hardly generous, but well above the record lows that investors were getting just 18 months ago. People who believe they can get a decent, relatively risk-free return from bond investments are tempted to abandon the bumpy ride in the equity market provided by stocks for a smoother course that involves clipping coupons, except we don’t clip coupons anymore. Bond rates go up and the very delicate supply/demand balance shifts, at least temporarily, in their direction, and you have the recipe for a stock market correction.
This change provides us all with the opportunity to do an interesting exercise. It’s possible that the markets will drop further, perhaps even, as we saw during the Great Recession, much further. Or, as is more often the case, they may rebound after giving us a correction that stops short of a 20% downturn (the definition of a Bear Market). We saw the market rebound once a budget bill was passed and corporate earnings continued to outperform expectations. The rebound could start a rally of volatility for several weeks or some weeks or months from now as the correction plays out.
Once it’s over, no matter how long or hard the fall, you will hear people and the media say that they predicted the extent of the drop. So now is a good time to ask yourself: do I know what’s going to happen tomorrow? Or next week? Or next month? Is this a good time to buy or sell? Does anybody seem to have a handle on what’s going to happen in the future? If you are curious, record your prediction, and any predictions you happen to run across, and pull them out a month or two from now.
Chances are you’re like the rest of us. Whatever happens will come as a surprise, and then look blindingly obvious in hindsight. All we know is what has happened in the past. Today’s market drop is nothing more than a data point on a chart that doesn’t, alas, extend into the future. We also know that fear is a feeling that is meant to be experienced and moved through our body system. If we do not experience that fear, it becomes an imprint (the catastrophe imprint) linked to a market drop and prevents us from seeing clearly when a new market cycle erupts.
The following napkin drawings from Behavior Gap, created by a colleague, depict the fear/greed cycle of investing. This human behavior is centuries old. All of us have a little bit of greed and a bit of fear that get activated when the market begins to nosedive.
Greed/Buy

Meaning in life, as in what really matters, is the touchstone to keep you grounded in your heart, mind and body centers. Market swings are going to happen; but, what matters most to you is the sustainable truth and invitation for you focus when confusion, fear or uncertainty arises. We offer a second napkin drawing from Behavior Gap, which focuses us on those things we can control and that bring us closer to what really matters.

What You Should Focus On

What we do know from metrics and fundamentals is this…

1.     Over the last hundred years, the general direction of equities as measured

        by all the equity indices is up.
2.     During any given period a certain amount of cash (or liquid securities such as
        short term bonds) us prudent to maintain so that your investment portfolio is
        not harmed by liquidations during the period the market drops.
3.    For the vast majority, sustaining an investment plan through both up and down
markets rewards the investor at any stage in life-just starting out, during a
career sweet spot, nearing retirement or fully retired.
4.    Peace of mind abides when we give attention to the areas of life we can control
and matter most.
Sources:
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