The Big Picture
“There is only one side to the stock market; and it is not the bull side or the bear side, but the right side.” -Jesse Livermore
Jesse Livermore was an American stock trader and pioneer of short-term trading strategies. He was a legend of his day.
Just 5 long weeks ago what a different world it was. On Sunday, February 23rd, the world received the news that COVID-19, commonly referred to as the coronavirus, would not be contained to China and the surrounding areas. This was the catalyst to trigger over a 30% drop in the broad markets. As we have witnessed in recent corrections, market drops are much faster than in times past.
Number of days for the market to decline 20%, or enter Bear territory. COVID-19 market drop the fastest ever.
The human impact of this virus is significant and serious for those with higher risks and preexisting conditions. I encourage everyone to stay safe and follow the protocols from health professionals. Under the circumstances, the discussion of financial and economic impacts may seem trivial. However, times like these are the reason MPC money management exists.
So I must pose the question, did you follow a process?
Have a Plan and a Process!
From the Trenches
“Bear markets make people a lot of money, they just don’t know it at the time.” -Shelby Davis
For those who have been reading my commentaries over the years, I have never hidden that fact that I am not a fan of “buy and hold”, or “buy and hope” investment approaches. While the overwhelming majority of financial advisers still advocate the “do nothing” approach when a bear market begins, I would like to remind you why a bear market can be so damaging and potentially alter your financial future.
This is simple mathematics.
Before we get deeper into this I want to be clear. There is no strategy that will get you out of your investments at the peak value. Just as there is no strategy to get you invested at the bottom price. You will always experience some draw-down when investing. The key is to manage the draw-down with a maximum target where the focus changes from capital appreciation to capital preservation. We do this through process.
If you are down 15% your needed return to get back to even is 17.7%. Based on market rallies after a bear market this recovery is generally well under one year. If you are down 40%, 50%, and beyond (which I have heard of several investors down that much or more following traditional investment thinking) the trip back to even may take years. This is permanently damaging to your financial goals.
My intention here is not to throw fuel on the fire. I am not a fan of the fear messaging that so many thrive on. My intention is to inform you that there is another way to approach the financial markets that doesn’t involve massive draw-downs and losses.
If you are caught up in this event and are thinking to yourself: “Is there another strategy or solution that may benefit me and avoid the disadvantages of traditional investment strategies?” There is, and we are here to discuss with you.
A quick point on “timing”. A new client asked me the age-old “sounds like we are trying to time the market?!” The traditional financial machine has done a great job in nailing this agenda-driven message home. Timing the market is not possible. It implies one can pick bottoms and tops which nobody can repeatedly accomplish. The difference with timing and process: Process sets rules revolving around scenarios we experience in the markets. Process takes the emotion out of decision-making. Process is repeatable. All for the sake of managing risk and avoiding material draw-downs. Staying invested for the sake of not being labeled a “timer” and you’ll find yourself watching your hard earned savings disappear! (Ask yourself, who benefits by your staying invested?)
Bottom Line: Draw-downs in investing are unavoidable. However massive draw-downs that may take years to recover from are catastrophic to your financial goals. There is another approach, is it time to step up the strategy?
“At least us old men remember what a real bear market is like, and the young men haven’t got a clue.” -Jeremy Grantham
A good observation considering we are coming off of the longest bull run in history. I have already heard from many younger investors shell shocked by the markets over the past few weeks. “This couldn’t have happened…” Unfortunately the strategies that so many blindly followed led them right into the mouth of the bear.
Now that we are firmly in bear territory I would like to bullet point some characteristics and expectations of the 2020 BEAR:
- The government is pulling out all the stops in order to subdue the damage that COVID-19 is causing. This will take some time to work itself out. I would not expect a quick recovery, even with these efforts the damage to the economy is material.
- I am not an epidemiologist. That said, the best data I have seen we are weeks away from peak COVID-19 cases in the U.S. We are weeks and even months away from the true understanding of the economic impact of COVID-19. Patience will pay off here. Do not rush to conclusions that the worst is behind us.
- Bear markets tend to follow a very different path than a market correction. A bear market is defined as a 20% drop from the highs. Furthermore, a bear market with a recession, is another factor altogether. A recession is defined as two quarters of negative GDP. These markets generally do not “bounce back” as quickly as a common market correction.
- Bear markets average approximately 22 months in length. We are in month 2! Patience will pay off here! Being too early to the party can be just as bad as being too late. There are specific factors we look for to help determine when the bear is subsiding.
- Lastly, the best opportunities to “Buy America” come on the tail end of recessions. The trick is to not participate with your hard-earned invested dollars on the way down. Having some “dry powder” available is the only way to participate in the ultimate recovery.
Bottom Line: The bear has arrived. The best course of action is to stick to your plan and have a process. What is your process for bear market investing?
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.Past performance is no guarantee of future results. All investments involve risk and may lose value. There is no assurance that the objectives of any strategy will be achieved. No strategy can guarantee a profit or fully eliminate the risk of loss.
Securities offered through IFP Securities LLC. dba Independent Financial Partners (IFP) member FINRA/SIPC. Investment advice offered through IFP Advisers. LLC dba Independent Financial Partners (IFP), a Registered Investment Adviser. IFP and MPC Wealth are not affiliated.