Pain in the markets … the right response for your portfolio today … a change of perspective on the market weakness

 

This market is brutal. Let’s not pretend otherwise.

As I write Monday mid-afternoon, the three major indexes are down substantially, though they’re all up from their lows this morning.

But it’s important to view this with perspective.

From a Schwab study conducted back in 2020:

These market corrections are more common than you might think.

Over the five years since Schwab Intelligent Portfolios® was launched in March 2015, there have been five corrections including the most recent one.

These occasional pullbacks have historically been followed by rebounds, according to the Schwab Center for Financial Research.

Since 1974, the S&P 500 has risen an average of more than 8% one month after a market correction bottom and more than 24% one year later.

Investing in a diversified portfolio and maintaining the discipline to stick with your longer-term plan through these periods of volatility are among the keys to investment success.

Schwab then went further back, examining intra-year stock market declines from 2000 through 2019.

They found that a decline of at least 10% occurred in 11 of those 20 years – 55% of the time.

Despite this, stocks rose in most years, with an average gain of roughly 6%.

Here’s additional perspective from Forbes:

There have been 27 corrections in the S&P 500 since World War II, with an average decline in the index of about 14%.

The market has always recovered and returned to new all-time highs—sometimes within a few months, sometimes in a few years…

It’s normal to be nervous when a stock market correction arrives. But the first rule to follow during any correction is to get some perspective on what’s happening.

***Your perspective on this downturn should be relative to your specific financial situation

“This is the prelude to a far worse drop – get out.”

“This is normal correction within a sustained bull market – hang in there.”

There are many pieces of evidence to support either market outlook today.

So, how do you handle it?

You ignore both broad-brush sound bites and analyze the risk/reward tradeoff relative to you, your personal financial situation, and your investment time horizon.

The same Forbes article above went on to quote a financial author who provided what I believe to be questionable advice:

Once a correction happens, limit your exposure to news about it and avoid checking your balances.

Fear can trigger impulsive reactions, like selling into a downturn and locking in your losses. Remember: If you haven’t sold it, you haven’t lost it.

I was a young investor during the Dot-Com crash. One of the stocks that tanked my portfolio was the high-flying JDS Uniphase (JDSU).

JDSU’s stock was destroyed. That’s not hyperbole.

The price dropped from $153 per share to less than $2 per share.

Would not checking on JDSU and adopting the mindset of “if I haven’t sold it, I haven’t lost it” have helped protect me from these losses?

Of course not.

I lost a bundle on JDSU, but I eventually sold at a stop-loss price that prevented me from riding it all the way down to $2.

“Ignore” is not a well-constructed strategy.

***The right advice during a correction like what we’re experiencing is simple…

Follow the investment plan you made before the market volatility began (if you missed our Digest on creating this plan, click here).

That includes monitoring your stop-losses as well as reasons why you would, or would not, sell a stock. Those levels and reasons will be specific to you.

Are you months away from retirement and have a nest egg that needs protecting?

Great – monitor the stop-losses you’ve set for your portfolio, then sleep easy knowing that if you reach those levels, you’ll sell and things will be fine because it’s all within the parameters of your plan.

Are you decades away from retirement, don’t mind the volatility, and want to hold for the long-term growth story?

Great – check your plan, make sure your stocks remain the right way to play the growth story you’re targeting, then go about your life.

Bad advice isn’t “sell” or “hold,” it’s anything that’s outside the scope of your plan, which was tailormade for your specific needs.

In any case, what’s critical is avoiding this:

 

***Now, all that said, here’s some important perspective for anyone with at least a medium-term investment horizon

Moments like these create conditions for wealth-generation. For more on this, let’s turn to our CEO, Brian Hunt.

Beyond running InvestorPlace, Brian happens to be an accomplished investor himself based on his decades of experience. Fortunately, he also enjoys writing about his lessons learned (be sure to check out Brian’s investment essays in our InvestorPlace Education Center).

Now, even though what we’re experiencing in the market today is not abnormal if we go by historical volatility, it can feel like a crisis. In fact, the media relishes in making it feel like a crisis.

But that’s your advantage.

Brian has an essay titled “Why You Should Learn to Appreciate a Good Financial Crisis.” I encourage you to read the entire piece, but for now, here are some excerpts:

…thanks to a unique type of market event, there are times when entire groups of stocks climb 100% in a year … and 200% – 300% in two years.

These events lead to “warp speed” wealth generation for shareholders…

As powerful as this event is, the average joe runs away from it. That marks a critical distinction between naive investors and wise investors.

In fact, how a person views these events is one of the defining differences between the rich and the poor. The poor are bewildered and angered by these events. The rich see them simply as how the world works … and as the creators of huge opportunities.

What is this event that creates “investment magic”?

A crisis.

***Remember, the truth of what is actually going on during a crisis

Brian makes the point that one of the primary goals of an investor focused on asset accumulation is to buy quality assets for less than they are worth.

And one of the only times that investors have a chance to do this is during a crisis. When fear rules the day, people sell the stocks of great businesses for less than they’re worth.

Back to Brian:

A crisis creates massive empire building opportunities because it introduces tremendous amounts of emotion into the financial markets.

A crisis creates panic. When people panic, they dump their ownership stakes in stocks, bonds, real estate, and commodities with little regard to their real values or ability to produce income. They just sell first and ask questions later. This creates huge declines in asset prices and huge volatility.

Last week in the Digest, I pointed toward the biotech sector. We looked at the SPDR S&P Biotech ETF, XBI. Since early February of last year, XBI has lost about half of its value.

Why?

Well, it’s not based purely on fundamentals. There are many biotech stocks putting up solid numbers. Much of the selloff reduces to fear.

I reached out to a friend who runs a successful biotech fund to ask him what’s behind the weakness.

He said it’s little more than biotech being considered a risk-on asset, so it’s being “thrown out with the bathwater,” so to speak.

Consider the breakthroughs we’re making today in vaccines, gene editing, 4D printing and tissue engineering, quantum microscopes, biosensors…

Consider how that’s going to change the quality of our lives this decade – and in light of that, how much money will flow toward the biotech winners offering us these breakthroughs.

Now, consider the price tag for a basket of biotech stocks is 50% off.

Back to Brian:

…when emotion levels go off the charts…emotion completely overwhelms reason.

During a crisis, the price of assets decouples from the value of assets.

This, of course, means if you can keep your head while others are losing theirs, you can buy assets at fire sale prices.

***This is not a license to go load up on XBI, and I’m not suggesting the bottom is in for the broad market

What I am saying is that these moments of downside (and potentially more downside ahead) are when you can set yourself up for huge gains in the months/years to come – within the context of your overall investment plan.

Don’t stick your head in the sand.

Mind your stop-losses, if you have them. After all, that’s how you amass fresh capital to deploy into amazing opportunities when the dust settles.

Meanwhile, get on the lookout. This is the store announcing a sale on selected inventory. Look for quality assets where price and value are decoupling.

We’ll be bringing you opportunities here in the Digest, and our stable of analysts will be all over them in their respective services.

But your ability to take advantage begins with the right, balanced perspective.

We’ll continue to you up to speed here in the Digest.

Have a good evening,

Jeff Remsburg