A Little Too Quiet

July 24, 2017 | Paul A. Ruedi
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In one of my favorite Western movies, an uneasy John Wayne warns that it’s “quiet…a little too quiet.” I can’t help but feel the same way about the market these days. It’s just a little too quiet.

It has been a long time since our last correction of even 10%.  Can any of you remember the last one?  I didn’t think so.  Let me remind you, once again, that this is unusual.  Since the end of WWII, we have experienced a correction of around 15% every 15 months on an average*.

The Standard and Poor’s Index has gone over 170 days without a decline of even five percent from its highs.  To put this into perspective, I did find longer streaks in the past couple of decades, but only two.  Such an extended period of low volatility suggests to me that it would make sense to be ready for a health-restoring correction.

No, I don’t mean “be ready” in a sense that anyone should make a change in their investment portfolios.  This is not a market call.  I simply want everyone to be mentally prepared for when the next inevitable temporary decline occurs. Consider this a lifeboat drill.  Clients that have been with me for decades know that I have held such drills from time to time.  They tell me that my lifeboat drills allowed them to keep their heads when most could not.

I do this because human nature does not change.  Every time investors see 30% or so of their money invested in the great companies of America and the world (seemingly) disappear, their response is rather predictable. 

Even though this type of decline happens once every five years or so, they are still surprised, and this surprise often turns to fear.

Keep in mind, at this same time the bad-news bears begin to crow about being vindicated.  The headlines begin to announce the end of the world as we know it, what I call the “apocalypse de jour”.  Having recently asked their advisor if they have too much in bonds, they are now frantically asking if they have too much in stocks.  They think that “this time it’s different,” the four-word financial death song.

They start checking their account balances more frequently.  They tend to let the short-term movements of their investments drive long-term decisions with their capital.  They begin to operate like short-term traders rather than lifetime investors.  Because they allowed themselves to be surprised, they mistake a normal bear market for a permanent decline.  They panic.  They make “the big mistake,” of selling out of their stock investments at the worst possible time.

The only antidote to all of this is to recognize ahead of time that such periods are just simply a part of the deal.  If investors desire the premium returns that the great companies of the world have historically provided, they must constantly remind themselves that the premium returns come with premium fluctuation.  Most refer to this type of fluctuation as “risk”.  I call it for what it is, fluctuation above and below the permanent uptrend in the prices of the great companies of America and the world.

Temporary declines will come and go.  They won’t materially impact a lifetime investor unless that investor makes “the big mistake” of reacting emotionally and turning a temporary decline into a permanent loss through their own behavior.  We need to prepare for stressful times like these during the best of times, quiet times like these when everyone else has seemingly forgotten that they occur and what they feel like.  

I almost look forward to these normal, health-restoring temporary declines. They remind us of the deal we make when we invest in stocks.  Until then, I’ll just try to enjoy the quiet, even if it is just a little too quiet.

*Past performance is not indicative of future results.