Should You Keep Calm or Freak Out?

Monday (8/24/15) was a historic day.  The Dow 30 stocks were down at the open about 1,000 points and closed down about -4% for the day.  The markets were also down about -5.7% the week prior.  What a rollercoaster ride.  According to S&P Capital IQ, there have been 19 corrections since WW2 and the average decline was -14%.

Key Points/ Why is this happening?

• Earning expectations have been falling for companies
• Economic weakness in China and devaluation of the yuan
• Generally slowing global growth, commodity weakness (oil under $40 to $50) and deflationary concerns.
• Uncertainty over Fed policy and the Fed attempting to normalize interest rates.
• Investors seem nervous and summer trading volume is low.

 What should you do?

1) Focus on what you can control. Don’t fixate on the news.  The media loves to talk about doom and gloom.  Bad news and stories of panic get higher ratings.

2) Don’t panic. Investing is about having a plan and sticking to it.  Investing is about process and discipline.  It is perfectly normal for stocks to go up and down 5% to 25% in a very short period of time.  Focus on the long-term… 10 years, 20 years, 30 years, 40 years+

• Here are some of my favorite quotes from the last couple days.
• “By definition, a correction is scary. Those who can keep their wits about them will win” Brian Westbury
• “Out of the 22,793 trading days since 1928, Monday was the 249^th  worst day” TMFHousel
• “The stock market is the only market where things go on sale and all the customers run out of the store” Cullen Roche
• Keep in mind that the market is still up 300% from the market lows of 2009.

3) Expect continued volatility as markets and the Fed attempt to normalize rates over the next couple years. Markets adjust almost instantly to both good and bad news.  If you are saving for your retirement, this is an opportunity to dollar cost average into your 401k or retirement accounts.  Do not try to time the markets, it just doesn’t work consistently.

4) Reduce your spending so you can save more. Make a goal to save 20%+ of your gross income.  If you are retired, consider spending less from your investments.

5) Do you have an optimal asset allocation for your goals and risk tolerance? Bad investing behavior (selling stocks in a crisis) can really hurt your returns over time.  Make sure you have global diversification, high quality bonds, value companies, small cap companies, companies with high profit and maybe consider some hedging strategies to further reduce risk.  We suggest to our clients that if you need the money in less than 7 years, it shouldn’t be in stocks.

6) Most people need a coach. Consider getting a 2^nd opinion from a low cost, fee-only Advisor.  Make sure your Advisor is a fiduciary for you 100% of the time.  We offer this free 2^nd opinion service for portfolios above $500k in assets.  Most people are shocked by how much they are paying in fees to their broker or bank.  Often times, these fees are above 2% to 2.5% per year.  This is way too much to pay.  Give us a call @ 303-549-4720 and we will show you the red flags.

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On a personal note, here is why I don’t sell in times of crisis:

• I’m a long-term investor (with a time horizon of 10 to 40 years – maybe 70+ years if you count what I do for my kids and other generations)
• I’m a taxable investor for much of my stock portfolio.  So if I sell, I have to pay taxes on gains.
• I don’t know what the markets will do over the short-term but over long periods of time, I believe in capitalism and corporate profits.
• I want to be an owner of companies, not a lender for bonds.  I own bonds for stability and to smooth out stock returns.
• I think market timing doesn’t work.  You have to be correct twice (for the sell and when to buy again).
• I’m mentally prepared for a sharp decline.  It is very normal for stocks to decline 5% to 25% in a short period of time.
• I will buy more (and rebalance stocks and bonds) when stocks decline dramatically.  I know this will happen over the next 40+ years.
• I believe stocks will eventually recover from a crash.
• I think that returns over the next 5 to 10 years may be significantly lower than historical average for both stocks and bonds…… but you still have to invest for retirement.
• I am long-term bullish on capitalism, the USA, cheap energy, improved manufacturing, productivity and technology.  The future is bright.

Keep calm and carry on!

All the best,

Todd

Corrections from an all-time high – Source Reformed Broker blog

Stock market SP500 returns over 1 year, 5 year and 15 year periods (1926 to 2014) – source Morningstar

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