Rent is Due.

The market called. Rent is due.

You didn’t think it was going to happen today. Neither did I.

I’m talking about a 2% market pullback.

Morgan Housel, one of my favorite authors of financial books, blogs, etc., usually refers to market pullbacks as “the cost of admission” which is a good way of highlighting the natural cost of being able to participate in the long term growth potential of financial markets.

I’m going to quasi-plagiarize him (I doubt he’ll mind, I’ve purchased a couple hundred copies of Psychology of Money) and say that the market has called and “Rent is Due.”

Why Rent?

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

Thus, it’s time to pay rent for being here.

As of this writing at 12:28pm on Monday, the stock market (DJIA and S&P 500) is retreating more than 2% due to fears of the Delta Variant of the Coronavirus leading to more cases, more potential restrictions, and the possibility of a regulatory stranglehold on the economy at local and national levels.

I’d like two words from the above paragraph to stand out more than others:

Potential and Possibility.

You see, the price of investments reflect expectations of what will happen in the future. When a thing actually happens, investments don’t typically react how you might expect at that time because the expectation already moved the price.

So in order to get the jump on everyone and dodge a pullback like this, you’d have to predict an event that other people mostly aren’t predicting and then also predict how a bunch of emotional humans (investors) are positioned to react to the news of that original accurate prediction. That’s a lot of faith to put into some guesses.

Personally, I’m not especially worried about what will happen, because you and I and everyone who is investing based on a plan is well aware that the next several days of market activity are not meaningful in determining whether or not they meet their financial objectives.

Example of a plan:

• I work with a client who is buying a house next month; she will need funds from her portfolio to complete that purchase. Because we talk regularly, we stay on top of situations like this and we’ve accounted for the need and adjusted strategy as necessary.
  
  When you have a pre-set need for funds at a specific time, we have to reflect that in your asset allocation (i.e. the % of stocks, bonds, cash, etc.) and start protecting against declines as that date nears.

The above client example highlights something very important:

We don’t make strategy adjustments based on a feeling that there may be a stock market pullback. Those kinds of decisions almost always lead to bad long term outcomes.

Strategy should always be dictated by intent, or when and why you need the money from your investments.

The further into the future the “when” the more you can shrug off bad short term periods for investments. If your “when” is around the corner, the declines matter more. But if your “why” is flexible (i.e. you wanted to sell investments to buy something but you don’t really need to and can just put it off) then you can handle short term declines even if the “when” would ideally be very soon.

Navigating this balance is the primary role of an investment advisor… It’s what I spend most time trying to understand for our clients.

Still, I don’t blame you for wanting a smooth ride. That makes you normal.

This is a sketch of mine from last year.

Getting from A to B is a unique journey, but it will never be smooth.

I could start throwing out a bunch of statistical arguments for why we should remain calm in the face of a market pullback but, for now, I’m going to leave this short, sweet, and with one more quick point:

The US Stock Market (as represented by the S&P 500 index) hit an all-time high one week ago. Since then the index is down almost 3% and the stock market is back to levels it hasn’t seen since….. June 24th. The market doesn’t just go straight up, think longer term.

If you worry about big down days like today that’s totally normal, but I’ll save my best "Don’t Panic” posts for drops of 10% or more (although I did drop some data below… I couldn’t help myself).

All the best,
Adam Harding

PS… Here is some data about frequency of declines, AKA “the price of rent”.