The Markets Are Going Crazy, Should I Be Worried?

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The last couple of weeks have been a reminder that the stock market is full of surprises, like them or not. We’ve seen daily fluctuations of 500 or 1,000 Dow points to be the norm, not the exception, which is a volatility we have not seen in a long time.

In fact, during the last 9 years, and especially last year, we have seen very few. Case in point, last year (2017) was the first time EVER that there wasn’t a month where the S&P 500 went down! As a result, many folks became comfortable and even cocky about the market performance, thinking this bull market could go on forever.

It Might be Time to Protect Your Profits

In fact, in the last few months I have been seeing articles about investors experiencing FOMO or “Fear of Missing Out” and jumping in with both feet. I have seen this in the past and it rarely ends well.

Three weeks ago during the Davos economic summit, Ray Dalio, who founded the world’s largest hedge fund, came out and said “If you’re holding cash, you’re going to feel pretty stupid”. I guess it just goes to show you that even the pros really don’t know what is going to happen. If you were in cash this week, you certainly are feeling pretty good right about now. The importance of having access to cash is a topic I discuss with all of my clients. I know that many advisers, like Ray Dalio, would have you believe that holding cash is a dumb move, but in my experience of 30+ years tells me that folks who keep a good cash cushion have fewer financial problems and stress in their lives and also have the ability to profit from markets like this, instead of being punished by them.

Is it Time to Sell?

I have heard this question a lot this week. In fact, I just read a pundit on a financial website saying that you shouldn’t sell now because you would be locking in a loss. What he didn’t say was that selling now could also protect you from additional losses! We just don’t know and can’t until after it happens. So is it time to sell?

I could give you a market analysis and talk about how the market touched major support today and then bounced back (for you technicians, the S&P 500 touched the 200 day moving average and then rallied about 100 points from that level) so we dodged a bullet, for today. But the truth is, this is irrelevant to answering the question, unless you are a trader and open to frequent buying and selling.

How to Know if You Should be Selling

I know most folks would like things to be simple and just say ‘buy’ or ‘sell’. Fortunately, it isn’t that simple. The first step in answering that question is: How are you feeling about your portfolio? If the volatility this week and the market dropping cost you even a minute of sleep, then you should probably sell. Direct participation in individual stocks or mutual funds is not right for you.

As I have written many times; money should help you sleep better at night, not keep you awake! A couple of years ago I wrote an article on this topic, ‘Is it Time to Sell Your Stocks’,  which lists the eight questions you need to answer before you decide.  You need to know as there are many considerations when answering this question. The biggest one is “why did I invest in this in the first place?”, which leads to “is this reason still valid?” After all it’s not just the market that changes, but our lives change as well.

How the Market Works

The bottom line is that this kind of volatility is part and parcel of how the market works. It is amazing how when the market is going up you read articles like “Dow Jones is going to 30,000” and when it is going down you might read “Dow Jones is going to 3,000”. This is due to human nature and something called “immediacy bias”. This is the fact that we always give more weight to what is happening now than what happened in history. That is why the saying “those that don’t learn from history are doomed to repeat it”. We know that looking back there is a drop of 25-60% every 5-10 years and a drop of 10% or more has happened 55 times in the last 73 years, so this is normal, last year was not.

I recently wrote and encouraged folks to prepare for increasing complexity and volatility. You can read that article here.

What Should I Be Doing?

In conclusion, take time to review your financial objectives and time lines, then check your gut for its reaction to current market action. Once you have clarified how you feel and where are you going, then make the adjustments that serve you. There are some huge risks that have built up in the stock and bond markets, don’t be blindsided by them. I don’t think this is going to end up being “the big one” but a much larger correction is likely sometime in the next couple of years. You have an opportunity to make adjustments and get your investments aligned with the above – kind of like chiropractic treatment for your financial life. Take advantage of the opportunity before it is gone.

If you aren’t sure how to determine the amount of risk or which assets you own that will get hurt the most in the next market drop, give us a call and we can sit down and identify if any adjustments are warranted.
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