Trail Financial Planning, LLC is a fee-only financial planning and investment management firm located in Bellingham, WA

John’s thoughts on a scary market

John’s thoughts on a scary market

Last week I sat in an airplane, returning to Seattle from a ski trip in Utah.  Two rows up from my seat, I watched a woman get up from her seat to head to the bathroom.  Just as she turned into the aisle, an angelic little face popped up from behind the seat.  The face belonged to a 2-year old, standing in her daddy’s lap, staring at her mother’s receding back.  The girl’s face was framed with black curly hair and a sparkling white earring in each ear.   Though her face was adorable, her look foretold high drama.  She wasn’t speaking, but anyone could read her look of unease.  Her brow furrowed.  Her eyes narrowed.  Her mouth pinched in from the sides, and her lower lip curled outward.  I could see her chest balloon in preparation to voice her concerns.  I decided to act. 

From two rows back, I put on my widest smile and locked eyes with the little girl.  Her face softened and smoothed.  She appeared curious, then connected.  She broke into a delightful grin.  We held gazes for several long moments.  Then, her eyes wandered.  Immediately the tempest (of doubt?  fear?  anger?) re-settled onto her face.  I started a silent “John bobble head puppet show” with my face and hands.  Again, she quieted, and her face transformed into delight as she swayed and smiled to my antics. 

For probably five minutes, this little girl and I danced across a small distance.  However, the peace was short-won.  I do not have super powers, only the tried-and-true parenting tricks of distraction.  That only works so long in the face of real anxiety.  And though it’s been a while since I was 2 years old, I would argue the 2-year old version of a “fear response” is a very real emotion.  She stopped watching me, and started looking around for mom again.  Soon, she started wailing.  I shifted to my back-up plan – I put in my headphones.  A few long minutes later, her mother returned, though it took nearly a half an hour for peace to settle back into the family.   

I only interacted with this girl for a few minutes, but the emotional journey she appeared to go through was vast.  This may be a stretch, but the last couple of weeks in the stock market have been a similar emotional roller coaster.  The market has been tempestuous, with dramatic wails (big red losses) interspersed by moments of calm, or even delight (big green gains).  But, mostly, the markets have been going down. 

Just like watching the little girl, I can feel swept into the mood of the market.  It can feel scary, and out of control.  Unlike my interactions with the girl, actions at this time can have long-term consequences.  This blogpost is my thoughts on scary markets, what may be learned, and what to do about them.  However, since I am already losing the focus of my more attention-challenged clients, I will cut to the chase. 

What should you do?

First of all, make sure that you have cash set aside in an emergency fund.  Typically, 3-12 months is sufficient.  An emergency may be one of the closest things to you growing your own superpowers.  (You can read more about my thoughts on emergency funds here.) 

Second, ask yourself two questions: 

  1. Have your life goals changed since the time you set up your investment portfolio?
  2. Is this market volatility keeping you up at night?

If the answer to either question is no, then you should probably ignore your account statements and just ride this spell out.  However, if your answer is “yes,” THEN you should re-visit your overall investment strategy, and make sure it aligns with your life goals.   Before you act though, talk over your ideas with a trusted friend or advisor.

The rest of this post is a deeper dive into what has occurred recently in the market, what may be learned from it, and my further thought on what to do about it.  Before I continue, I want to preface my writing.  I am going to write about finances and money, not about human health.  The human health ramifications associated with the Coronavirus are significant and more important than finances or investment markets.  I do not mean to minimize the situation.  

What is going on?

Two weeks ago, the stock market saw its biggest one-week drop since 2008.  The following week, the market swung erratically up and down, changing course as frequently as that little 2-year old.  In less than three weeks, the market is down by nearly 20%.  When the market is down 20%, the market will get tagged with an official label, “bear market.”  I am sure headlines will read something like, “Beware the bear.” 

The following figure shows what would have happened to a $1,000 investment place into the US stock market (blue) or international (orange) markets over the last month:

Chart by John Chesbrough. Data from Yahoo Finance. See Note

Ouch.  An investment of $1,000 placed about one month ago (Feb. 7, 2020) would now be worth $835. 

Is it a big deal?

Watching your investment accounts drop in value is not fun.  My personal portfolio has “lost” a lot of value over the last few weeks.  It can be scary.  To add to the fear factor, this drop seems attached to another scary story – the Coronavirus (of COVID-19).  Double scary.  However, down periods are how markets work.  For context, the US stock market is now at the same place it was one year ago (although international markets would be down).  If I presented the exact same chart as above, but with the original investment made one year ago, it would look like:

Chart by John Chesbrough. Data from Yahoo Finance.  See Note [2] for important details about the data.

Although the steep drop at the right side is scary looking, notice that the blue line is at the same level it was one year ago.   If I widen the view even further, we start to see the power of long-term investing.  The following chart shows the growth of $1 in the global stock market across the world since 1970, with several major global calamities pasted across it.  

Chart is courtesy of Dimensional Fund Advisors. See note [3] for important disclosures.

Over the long-term, the stock markets have rewarded a disciplined approach.  One dollar invested in the market in 1970 was worth $54 by 2018.  What shape will the current volatility end up looking like on the long-term charts?  A blip?  A dip?  A crater?  History suggests that the market will recover.    

What can be learned from the recent market decline?  

Stock markets are not humans.  However, the actions that move a market (buys and sells) are determined by individual investors (or the computer programs they wrote).  I appreciate watching the movements of markets, because they are a collective voice – millions of humans “putting their money where their mouths are.”  There is a level of information that is different than what we learn from conventional media.  However, there is no context given, and the reasons behind market movements may be complex.

I think the whipsawing prices make sense.  They reflect the large levels of uncertainty regarding the health impacts of Coronavirus.  The economic repercussions are even less predictable.  Here are the few of the question I have with uncertain answers:  

  • Will the virus become a pandemic?  Will it prove to be more deadly than current data suggests?
  • Will global supply chains (of products and services) be disrupted?  If so, how much?
  • Are we heading into a global recession?
  • Will there be baby Yoda dolls available next holiday season?

Markets are supposed to be rational.  That is the essence of an efficient market hypothesis – that investment prices are efficiently set, incorporating the entirety of known information about those investments.  Is this current market behavior rational?

That is difficult to say, but in the face of large uncertainty, I would expect the market to behave quickly, and aggressively as new information is absorbed.  In that light, the current market movements are rational.  Most of my personal investment portfolio is managed by an investment company called Dimensional Fund Advisors (they build and operate the funds I am invested in).  They released a statement recently about their thoughts on the current market volatility.  It is short, and essentially says that markets are reacting as we would expect given an “efficient market hypothesis.”  Here is a link:

The Coronavirus and Market Declines

What should you do?  Focus on what you can control

For most people, investing is calculated bet that the future will look better than today.  The future, of course, is invisible until we get there.  Thus, there is an irreducible amount of uncertainty associated with investing.  In this way, investing is not like building a house.  What should be done when the level of uncertainty is impossible to reduce?

Whenever I face a situation with a lot of uncertainty and accompanying nervousness, I like to separate out what I can control from what I cannot.  In an investing context, I can control my decisions to buy and sell investments.  I can control how often I look at my portfolio.  I can control my spending, my savings, and my life goals.  I can re-evaluate those goals.  I cannot however, control the movement of the markets.  I can evaluate my long-term investment strategy.

However, there ARE some constructive investment actions (tactics) you can make in a down market.  You can evaluate taxable accounts for tax-loss harvesting options.  You can look for buying opportunities by finding good bargains or by simply putting idle cash to work in your portfolio.  You can think about whether a lowered market value makes a Roth Conversion more appealing.  You could write a blog post about your thoughts on the market ;).  These are tactics I am evaluating with my client portfolios.

But the news is so scary!

Yes, the news is scary.  Here are two headlines from the last few months:

Seattle Times, January 28, 2020.

Does this headline compel action?  Should you pack the family wagon and move to Phoenix?  Maybe.  For example, if you have a new job opportunity or your grandkids now live in Phoenix and you want to be closer.  But, if it is January, all of your boots are muddy, and you are thinking about leaving Seattle because of the weather, you should wait a couple of months.  Then, re-evaluate your thoughts.   

Wall St. Journal, Feb. 28, 2020.

Does this headline compel action?  Should you move your investments out of “harm’s way?”   

There MAY be good reason to take action.  If fear leads to anxiety which leads to you losing sleep, that MAY be a good reason.  In the investing world, we call this a person’s “risk tolerance.”  It is the amount of loss you can stomach without it invading your mental happiness.  However, such a move should be accompanied by a reasonable discussion of your life goals.  I don’t advocate making changes to an investment strategy based on a change to your risk tolerance. I advocate you base your investment strategy on your life situation – when will you need your investments?  How much risk do you need to have?  What are your goals?  If those questions have changed, you should revisit your investment plan.

A return to the kids

As most parents know, when your toddler is screaming you should check the obvious – is she hungry or thirsty?  Is she teething?  Does she need a diaper change?  Although kids can appear maniacal, just below the surface their reactions are often rational.  However, their reactions may become disjointed from the original cause.  Sometimes, as a parent, you just need to wait it out.  Wait for that little person to work through an emotional journey in the only way they know.  Winnie-the-Pooh offers children and adults alike some sagely advice when it comes to waiting.  

People say that nothing is impossible, but I do nothing every day.  

– Winnie-the-Pooh (from A. A. Milne)

I agree.   But, I think Winnie-the-Pooh sells himself short.  He DOES do things.  He eats honey, he takes a nap, he enjoys the sun, he spends time with his friends.  Do those things.  If you are contemplating an investment strategy change, talk to someone who you trust, who knows you, who will listen to you, and who knows your financial situation before you do anything.  If you still consider that your life goals have changed or you are still freaking out, then you may want to consider a different investment strategy.  Make a plan for the long-term.  Write it down.  Sleep on it.  If it still rings true the next day, then consider taking action.  

 


Notes

[1]  Data source:  Yahoo Finance,  https://finance.yahoo.com.  The chart shows the performance of two exchange traded funds, SPY and ACWX.  SPY, or full name “SPDR S&P 500 ETF Trust,” is an Exchange Traded Fund designed to match the performance of the S&P500 index.   AWCX, full name “iShares MSCI ACWI ex US ETF,” is an Exchange Traded Fund designed to match the global equity markets except for the US stock market.  Past results should not be used to forecast future performance. 

[2]  Data source:  Yahoo Finance,  https://finance.yahoo.com.  The chart shows the performance of two exchange traded funds, SPY and ACWX.  SPY, or full name “SPDR S&P 500 ETF Trust,” is an Exchange Traded Fund designed to match the performance of the S&P500 index.   AWCX, full name “iShares MSCI ACWI ex US ETF,” is an Exchange Traded Fund designed to match the global equity markets except for the US stock market.  Past results should not be used to forecast future performance.  

[3]  Investing involves risks including possible loss of principal. International investing involves special risks such as currency fluctuation and political instability. Investing in emerging markets may accentuate these risks. Diversification does not eliminate the risk of market loss. This is for informational purposes only and is not to be construed as investment or tax advice. Talk to your financial advisor prior to making an investment decision.

John Chesbrough
john@trailfp.com

I am a financial planner and investment manager. I also am the owner of a fee-only, independent financial advisory firm called Trail Financial Planning. I enjoy working with people who care for others and their community – parents, firefighters, therapists, doctors, nurses, and teachers. I may be spotted at through my blog or on the many winding trails of Whatcom County. To learn more, or contact me directly, please visit my firm's website: www.trailfp.com.