After a brief respite from our ugly June statements, we are once again in a collective state of worry. Today’s current foe is inflation with rising interest rates as its sidekick. The media, both financial and mainstream, have latched on to this issue. Many non-financial people are now glued to the monthly CPI reports like they were of Covid cases during the pandemic. As with all crises, there is a sense that we won’t be able to escape this one. But, like those behind us – we do move beyond them and continue to prosper.
One unmistakable change this year is the rapid movement in interest rates. They are back to where they were 14 years ago. A mortgage is now 5%+ compared to under 2% only a few months ago. GICs and interest account now pay something. Making money more costly to borrow pushes individuals, companies and governments to adjust. And, as witnessed with our portfolios, we are also seeing asset prices feel the pressure. It is uncomfortable and creates pain for many people. However, our economy needs to regain a sense of normalcy where money is no longer free and inflation is extinguished.
During these stressful times our psychology changes. Our ability to see the long-term is swapped out for what is in front of us. Our nerves bring everything to the forefront. Those trumpeting negative, even dire, messages now sound credible and, in fact, almost like they are trying to warn; or help us. Those pronouncing a long-term approach seem out-of-touch like they are trying to sell something. As Chief Equity Strategist Barry Bannister once said: “The stock market will find your own weakest personal trait, and then do everything in its power to use it against you.” In times like these it is best to put your arms around your financial plan while the storm passes over.
Despite reminders that this time is not different many investors capitulate. One-by-one investors sell their portfolio of top performing companies because of the never-ending stream of bad news. As they move to the sidelines – the pain goes away. They’ve also turned their paper loss into an actual loss and will most likely never participate in the market recovery. That momentary relief comes at a high cost.
How would your future self tell you to behave today? Most likely, they’d be repeating the perspectives that led to your current investment success.
- This is Normal: Stock Market Volatility is Common. You’ve lived through multiple shocks of this magnitude and come out the other side. Still, they all feel gut wrenching. On average the S&P500 has an intra-year decline of 14%. Yes – each year – the S&P500 has a meaningful decline. Despite this the average annual return is over 9%. Bear markets, where we see 20%+ declines, are less frequent but a normal part of the market cycle.
- Don’t Try Anything Drastic: Attempting to Time the Market Invariably Fails. Study after study shows that the more an investor tinkers with their portfolio the lower the return. As the cliché goes: “…investing is like a bar of soap. The more you handle it, the smaller it gets.” Darcy Howe, a VP with Merrill Lynch. I also hypothesize that there is a positive correlation between how many times an investor checks their portfolio’s value on-line and their results.
- The End is Only Apparent in Hindsight: Returns Are Unpredictable. In hindsight, the causes of the market decline are obvious and the catalysts for the market recovery are evident. Unfortunately, the signals are confusing at the times. By the time the coast is clear, the rebound is typically also in the rear-view mirror.
It is often said that market declines return stocks to their rightful owners. We are rightful owners and I hope that we can maintain our stoicism during these tough times. It is imperative that we do not hand over what you have worked so hard for.
If you would like to talk further about your portfolio or financial plan feel free to get in touch. Until then, be well and enjoy the beautiful fall weather.
Thank you for being my client. It is a privilege to work with you.
Sincerely,
