Is the Stock Market a House of Cards?
The stock market volatility we’ve been experiencing and the apparent disconnect with the broader economy have some investors wondering just that. But what investors really need right now is discipline.
I went for a run this weekend. And a yoga session. And a bike ride. After spending my entire 45 years of adulthood being steadfast in my exercise regimen, I spent the last five months forgetting all of it, and I had gotten soft. Very soft. If someone would poke me — mercifully unlikely in these socially distanced times — I’d squeal like the Pillsbury Doughboy. Now I'm committed to getting back on that horse and sticking with it.
Investing can be similar to exercise in that both demand rigor and discipline. We can lose our way in investing — no different than diet and exercise.
During those hours of overdue activity, I spent some time dwelling on the current state of the U.S. stock markets and the economic carnage wrought by the COVID-19 pandemic. The S&P 500 index bottomed out on March 23, having lost a stunning 33.9% in less than five weeks. Since then, we have had a furious rally, with the S&P 500 exceeding its February high as of Sept. 2.
What’s Next for the Market? Don’t Ask
How can we reconcile the market rally with such persistent economic uncertainty? Is the 34% low point really going to be the worst we see during this pandemic? The simplest and most accurate answer is: Nobody knows. It is also the most frustrating answer. I could dazzle you with all kinds of data and statistics arguing that the market is a house of cards, but I could do the same for the argument that the market has more room to run.
Beware the self-proclaimed experts and pundits, particularly those engaged in fear-mongering. But that is easier said than done when we’re trying to decipher mixed economic signals, even for the most discerning among us.
I have a savvy client who e-mailed me of a rabbit hole he had recently ventured down on the Internet concerning the impact of a Democrat-controlled White House and Congress come the fall election. The prognostications by the supposed “experts” he found contended his investments and bank deposits would be confiscated by the federal government to feed its socialist agenda. He sensed it was a whole lot of nothing, but it was compelling enough to him to ask my opinion. I suggested he get some exercise.
Instead, Stick to Investing’s Golden Rules
Coming back to the stock market, though: We need to always remind ourselves that, while over the long run, the markets are fairly rational, there have always been short-term periods of irrational run-ups and sell-offs. The rigor and discipline we must always come back to as touchstones of investing are time-tested. Here are a few principles to keep in mind:
- First (and possibly foremost), have faith in democracy and capitalism, however regularly they are both tested. Winston Churchill quipped: "Democracy is the worst form of government, except for all those other forms that have been tried from time to time."
- Invest for the long term. Don't focus on daily or even quarterly results.
- Make sure your portfolio is allocated in a manner that is both age and risk tolerance appropriate.
- If you are using your portfolio to provide income, evaluate how much of the portfolio is rainy-day-worthy. For instance, if a recent retiree has $500,000, and $200,000 is in cash/fixed income (rainy day funds), plot out how long the rainy-day fund will last. If that retiree is taking out $20,000 per year, they have approximately 10 years of rainy-day funds. They could ride out a decade-long depressed stock market before they have to start taking money out of equities.
- Study up on risk-reduction solutions available if you simply can’t stomach the queasy market roller coaster. CDs, cash equivalents and annuities can be important parts of the portfolio, as long as you understand the thorns: Low yields, fees, limited liquidity, etc.
- If you are in your accumulation years and the market goes down, keep reminding yourself you are buying stocks on sale. Younger people in particular should embrace investing in stocks when the market goes south.
The Bottom Line for Investors Today
My wife and I took a Sunday afternoon bike ride. Fifteen miles in, we stopped at a wonderful outpost along a river. We sat down for a beer amid the large lawn and enjoyed some normalcy. As does happen in the Midwest, a pop-up storm brewed just west of us, and it became clear we needed to move … quick. Lightning was to the south, dark clouds to the west, and the wind turned the leaves that underside white spelling trouble. It struck me that we were rushing to find the safety of home, but the fields seemed to have a sense of anticipation of some much-needed rain.
The lesson? A storm can bring relief, but occasionally the damage can be more severe. The stock markets are no different. Hope for the best, but prepare for the worst.
Stay well. Wear a mask. Be patient with your portfolio. Remember: Panic is never a solution.
About the Author
Financial Adviser, CUNA Brokerage Services
Jamie Letcher is a Financial Adviser with CUNA Brokerage Services, located at Summit Credit Union in Madison, Wis. Summit Credit Union is a $3 billion CU serving 176,000 members. Letcher helps members work toward achieving their financial goals and through a process that begins with a "get-to-know-you" meeting and ends with a collaborative plan, complete with action steps.