Chicken Little, News Anchor
Sometimes in the past I’ve suggested that a current or historical figure might have made a good financial planner but today I’m looking at a different theme – people who get excited for no real reason.
Do any of these phrases sound familiar?
• Stock market rout
• Beaten-up stocks
• Ugly market
• Stock markets plunge
• 2018 market gains erased.
You may have seen some of them in print, online or on TV recently. They are snippets I took from actual programming or reporting. While all are accurate to some extent, none of them is of real value to a true stock or bond market investor. Each statement serves the writer better than the reader as it attempts to grab your attention and get you to tune in again or buy another edition.
Please try to remember, the people who write and deliver these headlines are not strictly in the business of news, they are also in the business of selling ads on news-related media.
Today’s hero, Chicken Little, has been around in one form or another, in one country or another, for hundreds of years. In the US, the story has been told since around 1840. Most versions have elements in common: there’s a hero (usually a chicken) who is struck by something (often an acorn) and takes it upon himself to spread the news that ‘the sky is falling’. This results in a flurry of activity, with panic spreading among the other animals. In most tales, the frightened creatures are invited to a place of promised safety, usually the cave of a hungry fox. I’m sure you know how the story ends.
The story suggests that those who ignore the ‘sky is falling’ message might experience a different outcome. Let’s look at some market history that doesn’t urge you to return for further updates. The current correction has absolutely reclaimed market gains so far this year with the S&P 500 dropping about 10% from its September 20th high. But that headline ignores the fact that the previous eight years have enriched investors significantly. How many times has a similar correction taken place during this run? Five times, about once every 19½ months (not including the current correction). And the result of these prior corrections? You know the answer. They were simply part of a bull market that has made all of us better-off financially.
Here’s a helpful graphic from the folks at Uncharted Investing:
Using the common definitions that a ‘correction’ is a pullback between 10% and 20% and a ‘bear market’ a sustained drop of more than 20%, you can see that these events are quite common. I have come to think of them as (a somewhat vexing) part of a healthy market but then, I don’t need to write exciting headlines to keep my job.
At WWAFP, we consider corrections to be part of the investing process so we try to prepare for them in two ways. First, we believe that a thoughtfully allocated portfolio offers the best chance of surviving a pullback, so all our clients’ accounts are structured to try to minimize these frightening effects. But as markets climb, we also try to opportunistically accumulate cash. That provides us with funds to invest during those pullbacks, hopefully leading to better long-term results for our clients.
Here’s a second graphic, this one from Fidelity:
No asset manager, WWAFP included, can avoid all of the ill effects of a correction nor participate in 100% of the subsequent recovery because human beings simply cannot foretell the future. But we do know that our approach has rewarded our clients in the past, so it’s one that we continue to employ.
As tempting as it may be to get caught-up in the excitement of those breathless headlines, please take a moment to recall how the frenzied participants in Chicken Little’s story wound up and avoid placing yourself at the mercy of a hungry fox. We anticipate that our clients will ultimately benefit from the current correction as we buy from people who choose to sell in a panic. Don’t let our gains come at your expense.