Posts Tagged ‘market volatility’
“In the short run, the market is a voting machine but in the long run, it is a weighing machine.” Benjamin Graham
The past week has been a stomach churner for any investor watching the equity markets. And I wouldn’t count on things settling down just yet. So much for the typically quiet August I expected.
Pointing out that this sell-off was long overdue, given that the US equity market has gone up for more than three years without a routine 10% decline, is of little comfort. While last week’s decline was sudden and felt enormous, historically declines are often like this. The bigger picture is that the US equity market has been very good to investors since the financial crisis. Anyone who had the stomach to go “all in” in early 2009 has earned more than a 160% return, before dividends, even after last week (see DJIA chart below from March 2009). From the 10,000 foot perspective I think is essential to adopt, last week’s declines in the major US market indices hardly register at all.
But I suspect the question most will ask is whether the market continue to fall and if so how far [NB: this was written Sunday]. The likelihood is that markets are undergoing that overdue “correction,” the term pundits use for a decline of 10-20%. Could it get worse than that? Sure, but that is a less likely result.
Whatever happens, CNBC and its counterparts in the print and electronic media will be weighing in on “WHY THE MARKET SOLD OFF” and “WHAT INVESTORS SHOULD DO NOW!” That is how they grab attention and make their money. The simple truth is best captured by the Ben Graham quote at the top. Markets rise in the short term because investors are confident, and sometimes even giddy. They fall in the short term because they are uncertain or even fearful. And for the moment, investor greed has given way to investor fear.
On the other hand, to paraphrase Warren Buffett, the American economy remains a strong engine of growth and over the long term will provide ample returns to prudent investors. That is the value that is weighed and that is the value that one invests in for the longer-term.
Assuming one is diversified and invested prudently, the only concern should be for those funds that you expect to be spent in the coming few years. For our clients who are, or will be, withdrawing funds, we maintain a significant cash reserve precisely because sell-offs such as these are unpredictable and we do not want to have to fund cash needs by selling assets under duress.
For anyone else, especially those who are accumulating retirement or other wealth, equity prices are some 10% cheaper than they were a month or so ago. They may get cheaper yet before they stabilize. But this is an opportunity to add assets to your portfolio at a lower price.
I know I have written the above repeatedly over the years. Frankly, the advice doesn’t change. One of my favorite investment observers, Jason Zweig, has said he just writes the same thing over and over again, trying to keep it interesting.
And speaking of Zweig, if you want some further reassurances, click on the link to read his “5 Things Investors Shouldn’t Do Now” in the WSJ. Channeling his inner Douglas Adams, Zweig’s important second rule is “Don’t Panic.”
Those of you who continue to insist you can even remotely forecast what might happen next continue to reveal incredibly foolish, thoroughly disproved beliefs, despite an overwhelming avalanche of evidence that you haven’t the slightest idea what the fuck is going on now, much less what is going to happen next.
Once again, the markets prove that nobody knows ‘nuthin.
That’s Barry Ritholz on the Us stock market’s impressive bounce back this AM
The thing is, it has to run its course – like a fever, or a greyhound at a Florida panhandle race track.
Josh Brown, The Reformed Broker, in an amusing post on market corrections
Buying stocks is an act of optimism. Holding through a sell-off is a function of conviction.
From a post at Yahoo Finance
As I wrote in my July letter, it has been some three years since the stock market last had a normal correction, a decline of more than 10%. These can be nasty experiences for those who may have accustomed themselves once again to steady market gains. This seems a dirty trick but it is just the way of the market.
A recent study, explored in Jason Zweig’s Intelligent Investor column in the WSJ, finds that individuals become risk-averse very quickly when exposed to the sorts of stresses provoked by sudden market declines. After such rapid sell-offs, markets typically recover gradually, but investors remain fearful of further losses and unwilling to take that risk for the prospect of seemingly small gains.
Exposure to stress makes people more loss-averse and diminishes their overall sensitivity to reward. and if a reward is of low magnitude, [people under stress] often don’t care about it very much.
Mauricio Delgado, a neuroscientist in the psychology department at Rutgers University in Newark, N.J.
There is no way to know whether the next market correction will come next week, next month or next year. But if there is anything that is certain, it is that there is one in our future. Which is why I am stressing that investors “fasten their seat belts,” by which I mean making sure that their portfolios are positioned so that the investor can psychologically (and financially) endure a 15% or greater stock market sell-off without panicking into selling.
This chart from JP Morgan shows the clear range-bounds of the US equity market since 1997, a fact we have repeatedly stressed in our long-term outlook. Money can be made (or lost) by catching these waves up or down, even if exact timing is impossible. Valuations, specifically (trailing, not forward) market PE ratios and Shiller’s PE 10, are our own guides to making judgments about where to add, or subtract, risk.
Fixed income has been doing the heavy lifting for most portfolios the last 10-plus years, as interest rates moved steadily downwards, and bond prices moved steadily higher. At some point, this paradigm of range bound US equities and climbing bonds will change. Far brighter minds than I have been predicting this, incorrectly now, for at least two years.
Chart pointer The Big Picture
Since August 1, there have been eight declines of 5% or more and eight gains of 5% or more in the S&P 500 index according to this chart from The Bespoke Group. By way of comparison, there were only two declines of more than 5% during the entire decade of the 1990s.