Time To Panic? Not Now, Not Ever

This week’s market update is posted and dives in on what is going on with markets (they’re panicking) and offers a reminder of how these events tend to play out (hint: favorably). Longer excerpt than normal;

The current decline when plotted out on a chart looks like a Black Diamond ski run. Declines of this magnitude in the course of a few days amounts to a panic and in moments of reason every market participant knows they shouldn’t panic. Now in a moment of market panic hopefully every market participant can remember they shouldn’t themselves panic. If you are reading this then you have been through at least one of these before in 2008 and you know what happened. It was the same thing that always happens. The market dropped a lot, it scared the hell out of a lot of people stayed down for a while and then went on to make a new high. This will be no different, the only variable is time; how long before a new high gets made.

As far as a game plan for the current environment it is important to understand that at any given moment there is a favorable case for equities and a negative case. Contributing to the negative case now is the deteriorating internals (you may have seen on CNBC that 143 S&P 500  components are down more than 20% and as of today that number will be bigger), the years of 15% price appreciation that came with 5% earnings growth (a point made by David Rosenberg), the duration of the current bull market, uninspiring economic data as well as the potential for the Fed to raise rates. On the plus side of the ledger there have been a handful of mid single-digit declines in the current bull market that proved to be buying opportunities, the Fed will still be easy if it raises rates in September, the collapse in energy prices should benefit most consumers and while economic growth has been weak there is unlikely to be a recession in the near term.

All of the above should lead to the obvious conclusion that no one can know what the market will do next. The simple solution is to simply stick to whatever strategy was laid out ahead of time when the market had not fallen 10% in three days. If this is the start of the next bear market then the bear market will last for some amount of time (about 18 months is a average length) then the bear market will give way to the next bull, will make new highs at some point in the future and then repeat the process.

This was true of the Great Depression, the mid-1970s, the tech wreck and the Great Recession. The details were different every time but the market manifestations were very similar. This means there are many valid strategies to confront this market and whatever is coming next with the understanding that if some valid strategy turns out to have been ineffective, it will be bailed out by time; see our recent blog post Time Is On Your Side.

Someone who has built a portfolio based on buy and hold no matter what (subject to rebalancing) should hold no matter what. Someone who has built a portfolio based on taking some form defensive action based on something like the 200 day moving average should have probably done at least a little by now. This is about portfolio discipline not predicting the future. The middle of an event (like a three day, 10% decline) is not the time to second guess strategy as emotions and uncertainty are likely to be heightened during such an event. Part of the reason to devise a strategy is to take emotion out of the equation when it counts.

Remaining disciplined is of course difficult. Holding on no matter what is going to be quite difficult when the market drops 30, 40 or 50%. Anyone taking defensive action last week will regret it if the market rockets higher from here or wish they had done more if the market goes down a lot from here. A particular strategy may not be the single best strategy for the current market event but can still be valid and get the job done. The worst thing that can happen is succumbing to emotion by deviating away from discipline.

Please click through for the entire update.

And from the world still goes on department; a horny toad from yesterday’s hike.


1 Comment

  1. I agree. It’s key to stay focused on the long-term, especially in times like this. Prices can change rapidly, but intrinsic value changes very slowly.


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