THE END IS NEAR!
by Stan Corey
To paraphrase an old saying: “No bells will ring at the end of a bull market just as they did not ring at the beginning!”
There is much concern today about the fact that the current bull market has now reached the ten-year mark. From the close on Monday March 9, 2009 to Friday March 8, 2019 the DJIA and S&P 500 are up by about 400 percent. But few thought that would happen. Here are a few headlines to provide some insight into how well the “talking heads” and “money market soothsayers” interpret the swings in the markets.
On March 5, 2009, CNN Money told us “Wall Street: Ugly is back. Nasdaq ends at a six-year low, and Dow and S&P 500 fall to fresh 12-year lows as investors fret about GM, Citigroup and the global economy.” On March 9, 2009, CNN Money reported “For Dow, Another 12-year low. S&P also finishes at lowest level in more than a decade as Wall Street resumes its retreat on economic worries.”
Ten years later, on March 8, 2019, Reuters reported “US Stocks: Wall St. falls for fifth day on weak jobs data, global growth worries,” while the LA Times wrote “This bull market hit the ten-year mark. Will it keep raging or will bears spoil the party?” The Barron’s headline was “The Dow is Down 122 Points because there’s Less Room for Optimism.”
Think about what you were doing in 2007 and 2008. If you had retired, did you stay in the stock market or run for the hills or gone into a bunker? In 2009 did you invest in stocks or go back to work? For many people, especially for those nearing retirement or just entering retirement, the market plunge of over 50 percent in less than 18 months was not just unsettling but disastrous. In hindsight, we can see that staying in the stock markets to some extent would have made a big difference on the longer-term outlook for those in the later earning years or in retirement. By the end of 2009, the markets had one of their best performances ever, up almost 60 percent. Unfortunately, very few individual investors were able to take advantage of this turnabout. The question is, why?
The simple answer is that we are human beings with emotions, and those emotions tend to dominate our decision-making. As a result, it is very difficult to make objective decisions about our own monetary affairs because we have many biases that can impede our judgement.
Let’s look at a few of them.
- Recency Bias. Recent experiences influence our decisions. If all you read and hear about is that the investment markets are down or volatile or “ugly,” are you willing to buck the recent trend?
- Fear Bias. If your portfolio just experienced a loss of 20 percent, would you add money to the investments or sell positions to protect from going down more? If you experienced the reverse, and your portfolio went up 20 percent, would you add more or sell to capture gains?
- Loss Bias. Often, people do not want to sell an investment that is down because they feel it will go back up and they do not want to admit they may have made a mistake in buying it in the first place. That is until the “pain” of the loss outweighs their ability to stay invested.
- Tax Bias. This time the investment has gone up 50 percent but many people are reluctant to capture gains as they may believe that it will continue to go up (Recency Bias) or they do not want to pay income taxes from selling the investment and recognizing the gains.
I have witnessed many very intelligent people make very poor choices when it comes to their wealth. If you think about it, why do most successful people have a whole team of advisers from the legal, accounting, finance, and medical professions to ensure their financial health and physical wellness?
Unfortunately, there is no one simple answer for the question about staying the course or making significant changes. Time and again it has been proven that “timing” the markets does not work very well. It is like flipping a coin ten times in a row getting “heads” you will “likely get tails” the next time you flip. In most all cases, taking a more balanced approach and rebalancing the portfolio quarterly or semi-annually to maintain the desired allocation works best over time. People who ride the wave up as the markets do well end up taking the biggest hit when there is a correction or the markets turn bearish as their portfolios are over weighted in the higher risk investments.
It is not a sign of failure to seek help. The financial world is more complex today than it was even just a few years ago. With this bull market it has not been that challenging to see positive results. But here again, even during the past ten years, many investors experienced losses due to the timing of when they made an investment and when they got out. The ten-year returns look impressive, but I can confidently tell you that few, if any, individuals experienced those kinds of results.
It all boils down to a simple truth: “Investment returns” and “investor returns” are never the same thing!
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Stan Corey has been a Certified Financial Planner Professional (CFP), Chartered Financial Consultant (ChFC), and Certified Private Wealth Advisor (CPWA) for almost 40 years. Though retired from the day-to-day activity of providing financial advisory services, he continues to consult in specialized areas as a financial fiduciary. Stan is a sought-after expert who regularly provides financial commentary at national conferences, in print and online publications, and on TV. He has a reputation for taking complex financial issues and making them understandable to the average person. He likes to say he is a “financial translator.” He has published two books: a novel, “The Divorce Dance,” in 2016, and a non-fiction work, “When Work Becomes Optional,” in 2018. Web site: www.stancorey.com.