What’s your plan? l Insightful Investing

By Jeffrey Moormeier | Oct 31, 2018

Market volatility seems like a bad thing. The news networks have a way of creating programming that keeps you watching. Fear is one of the strongest emotions in human beings. And the media has a way of playing to our basic fears. It takes a clear mind and intestinal fortitude to filter away the noise from the actual signal.

I have been through three “bear markets.” Two of those where extreme declines.

I would define those as declines of 50 percent or more. Both bear markets of 2000 and 2008-09 had declines in major indexes of 50 percent or more.

In fact, the decline of the NASDAQ in 2000-2002 was almost 80 percent.

How can you tell the difference between a market meltdown and normal volatility? That question is not easily answered.

Twenty-twenty hindsight is perfect. Hindsight bias is a psychology term, and when it is applied to the stock market, it can be a real enemy.

It has three elements to it. The first element is the tendency to misremember an earlier prediction about an event. We tend to look back on our earlier prediction and tend to believe that we really knew the answer all along. The second is the tendency, after the fact, to assume that it was something that was simply bound to occur. And last, we tend to assume we could have had foreseen certain events.

All of these thoughts make up the twenty-twenty hindsight bias. I will add one more thought: we tend to take credit when a decision works out and tend to look for a scapegoat when they don’t. All of these ideas are really harmful as an investor.  Investment decisions should be based on something more concrete. Over the past few months, I have talked about position sizing and financial planning. I am not going to cover those ideas now.

What do I look for to determine the difference between a market correction and a market crash? It is my opinion that bull markets do not die of old age, there needs to be a serious fundamental change in the economy for me to become convinced there is a “market crash” underway.

I just talked about hindsight bias. I can say that my ability to foresee the future is no better than anyone else's. The future will only be known when it becomes history. Therefore, I make my decisions based on a risk reward evaluation.

I am prohibited on how I personally apply risk in a public column like this. I may only speak in generalities, even though I want to be specific.

I have, however, in previous articles explained my views on “position sizing.” Position sizing simply put is deciding how much money to invest in any one idea.

Since 1929, there have been 48 times the market has declined by more than 10 percent.  There have been only five times when the market has decline by 48 percent or more.  Two of those times have been in the last 20 years, once in the 1970s and twice in the 1930s.

The reason that the 1930s was so horrible, in part, was because almost every year there was a massive drawdown of some kind. The only year that there was not a double-digit drawdown was 1935, and the largest drawdown in history from 1930 to 1932 was over 80 percent.

There have been 14 times that the market has declined between 20 and 45 percent and 29 times between 10 and 20 percent. And yet after all of this volatility, our markets have recovered and our economy continues to progress. We have a very robust system.

Keep in mind that the past does not predict the future and anything can happen.

I have just returned from a trip to Guatemala. There is a reason so many of their citizens are willing to risk everything to come here. The United States of America is the greatest place on the planet. If you are a foreigner and want freedom, an opportunity to get rich and have a high standard of living then you want to come here.

There is nothing like it on Earth. There is just one small flaw; if you have your money in the market, it goes up and down.

The market had some volatility while I was in Guatemala. And now that I am home I need to sharpen my pencil and look over my portfolio. One of the stocks I own has decreased by 50 percent. I need to make a decision.

What about you? What is your plan?

Jeffrey Moormeier of JG Moormeier Financial is a Mukilteo-based financial advisor affiliated with KMS Financial Services, Inc. an SEC registered investment adviser. His column does not represent the opinions of KMS, nor is it an official prediction or recommendation of any kind. The opinions expressed in this column are generalizations. For advise catered to your specific financial circumstances, contact Jeff directly at jeff@jgmoormeier.com or 425-931-8898.

Comments (0)
If you wish to comment, please login.