Open In Case of Emergencies

So far, 2024 has been a good year for market returns. The indexes chugged their way up the first half of the year with low volatility.

Meaning, you have likely enjoyed a steady, gradual growth in your account balance this year. That calm may be coming to an end.

The market is calling. The rent is due.

I’m talking about the recent market pull back over the last two days. Those steep declines on the far right of the chart above.

Morgan Housel, a favorite financial author of mine, refers to market pull backs as the “cost of admission”, which is a great way to highlight the natural cost of participating in the long term growth potential of financial markets. 

Why Rent? 

Frankly, because we want people to treat an investment portfolio less like a trip to Disneyland where they attend sporadically, and more like something that is always occupied and permanently a part of their lives.

Stock market declines are normal and shouldn’t scare us as long as we have time on our side. See the chart below.

But they do.  Market declines cause real discomfort.

Right now, many people’s portfolios (mine included) are near their all time highs. And now that we have this degree of comfort we don’t want to give it up. Which is understandable. 

When we see declines for whatever reason (recession fears, rate hikes, pandemics, etc.) we have to remember that volatility is the price you pay for what the market can, and has, delivered to investors for nearly a century.

A Disciplined Approach

Personally, I’m less worried about what will happen, because you and I and everyone who is investing based on a plan are prepared for prolonged periods of market declines. The next several days of market activity are not meaningful in determining whether or not you meet your financial objectives. 

I know a week like this can be frustrating. Where your market gains and portfolio momentum get violently pulled back.

But this is investing. We choose to adopt more uncertainty in the short term in an effort to gain more certainty over the long term. 

The below chart illustrates that trade off of risk and reward. It is zoomed out to the past five years.

• The green line represents the return you would have gotten if you invested in short dated US treasuries.  These investments represent the most certain bet in the world.

• The blue line represents the % change of inflation, measured by CPI, over the last five years.  

• And the orange line represents the handsome return the S&P 500 delivered for investors who stomached a massive amount of uncertainty over the last five years.  

But where do markets go from here?

I certainly have an opinion about the short term future in the market, but at this point of my career I’ve realized this isn’t part of a disciplined approach and no one can predict this reliably or consistently.

So, at the risk of being the 106th person to tell you, “you can’t time the market”,  I’d like to say something else.  

Open In Case of Emergencies.

In March of 2016, fifteen of my friends and I did a self guided rafting trip down the Grand Canyon. My friend, Chris, had the foresight to take an old protein powder container, spray paint it black, and label it with these words: Open In Case of Emergencies. He handed it to me at Lee’s Ferry before we launched.  I spent the next 15 days wondering what was in that barrel. On day 16, just after Lava Falls, the most notorious rapid of the Colorado River, I opened the barrel to find a bag of our old college snack, puppy chow.  It was just what I needed in that moment.

The below metaphoric barrel is for the next time things get scary.

Open this container, and read these thoughts, written by Adam, during the worst moments of the covid crash. 

I hope it will help you endure future market declines, so that you can participate in future market returns.

Because there will be a next current crisis, the one we don’t have a name for yet. You will be scared. And you will have a reason to open this container. 

It will be a defining moment.  And we will reach the other side.

Defining Moments

https://www.hardingwealth.com/fieldnotes/definingmoments

By: Adam Harding.

Let's pretend for a minute that it's the year 2025...

You’re looking back at the Corona Crash of 2020, the massive losses it dealt to your portfolio and how you reacted as an investor.

Just as we reflect on prior crashes, our accounting of what happened will contain phrases like “Of course ______ happened…” or “Clearly it was going to be a big deal...” or “Everybody knew that…”

In your brain, the crash of 2020 won’t be an accurate recollection of what it seemed at the time, because right now it seems irreducibly scary and uncertain. Time will pass, certainty will be given, and our fears will subside. That's how it works. 

In 2025 I'll be advising clients, some of them old and some of them new and during discussions we will reflect back on what decisions were made right now.

• Did we completely sell at a 30% loss?

• Did we buy?

• How close were we to the bottom when we bought?

• When we sold with the intent to get back in, how much of the rebound did we miss? 

Everyone agrees that 2009 or 2010 would have been the best time to buy stocks in a generation, but very few investors actually did. 

Why is that? 

...Take your pulse right now after watching the news for a few minutes.... THAT'S WHY. 

It's scary. 

Now I'm not saying that this is the bottom of this market or that you should rush out and buy stocks right now --after all, this crash has been the most unpredictable, rapid and unprecedented decline by almost every modern metric. But we should acknowledge the above and try to determine where we fit into history. 

I see the negative news, but I refuse to give into fear in these moments. 

I believe things will be okay. 
I believe the ensuing rebound will be prolific and not timeable.
I believe good things can come from crises.

I keep this disposition because 

(1) it would have been the right attitude to have in every prior market decline and 

(2) there is very little good news these days and I'm doing my part for balance things out. 

If you could magically wake up 5, 10, or 15 years from now, what would you think about your decisions made at this time?

Looking back at the financial meltdown of 2008-09, would it have been a good idea to buy stocks after a 30% decline even though the bottom occurred at about a 53% total drop? As time has passed, the answer is of course. 

We have no way of knowing when this will end. But we have our patience. We have our resolve. We have hope.... and yes, we have history.