This time its’ No’ Different
Markets Falls are common though we had the uncommon pleasure of not falling big for nearly a decade. What differentiates this fall from others is the fear that the world may never be the same again.
Almost all falls of the past are those that were caused by financial stress or bubbles caused by easy money policies or scams. This is the first real crisis caused worldwide by something that couldn’t have been foreseen.
Personally, I got it Wrong. As the Corona Virus started to make news, I tried to update myself on as much as possible and try to decide the future course when it came to my portfolio. The only similarity I could see is the Spanish Flu.
The American Market was the only one with reliable data I could rely upon. This was the performance of the Dow between 1918 to 1920.
At the time of the start which could be categorized as late 1917, Dow Jones was on a decline. From its peak in November 1916, it had fallen by 26% by September 1917 and fell a bit more before it bottomed out in December 1917.
In fact, by the time it ended, Dow was actually in the positive zone. Maybe this was a wrong example to look out for or maybe the impact then was smaller than its today, whatever it is, markets today are looking worse for the wear.
Yesterday, I popped this question on Twitter
Thanks for all those who responded.
One difference or this may be due to the nature of the media is that most people are not selling out in panic with most wishing to add more given the opportunity they feel this market reaction is providing them.
What the market does is not something in our hands, but our actions are entirely in our hands. Personally, I regret being unable to exit completely at the start or even post the first gap down. Then again, I was sticking to what my System was telling me and even today, the system has not gone fully into Cash.
Recently, I was reading Stocks for the Long Run by Jeremy Siegel. In it, he narrates a interesting episode which I quote,
In the summer of 1929, a journalist named Samuel Crowther interviewed John. J. Raskob a senior financial executive at General Motors on how the typical individual could build wealth by investing in stocks.
Raskob’s idea or plan for the retail investor was that by investing just $15 a month into common good stocks, an investor could expect to grow their wealth to $80,000.
A 24% return then as is now seemed ridiculous, but then again in the decade of 1920 to 1929, Dow had risen from a low of 64 to a high (set a few weeks after the interview) of 383. That is a compounded return of 25% per annum over 9 years.
But like the Magazine Effect, the Interview came close to the top, a top that was not breached for 25 Years. Yet, for some one who started investing systematically based on his interview was better off than a Bond Investor in just under 4 years. What did not happen though was reaching the 60K target, it ended at 9K.
The key to reaching our goals depends on two key factors. The amount of savings we can mobilize and invest and the returns that the said investment can generate. Equities is a preferred route for those who understand the risks over the long term, they have generally and I use the term generally because it also showcases that equities don’t work all the time, they have provided a higher return.
But when we say long term, it doesn’t mean the taxman’s definition of 1 year or even teh 3 to 5 year period used by most fund houses to sell their funds. Instead, one needs to be invested for a minimum of 10 to 15 years to reap the benefits.
Asset Allocation has to be the key decision for a mistake here has as much an impact as picking up a lousy fund or stock. The maximum pain point you can afford to bear is not something that is easy to locate in good times, it’s only in bad times you come to know what level of exposure was okay and what was not.
If we can agree that when this all ends, we will not end up in a dystopian society or become zombies, at some point the market will settle and then bounce back. No one knows which that level is which means that all predictions are just that, predictions without any greater chance than one you can come up with using a random approach.
As I wrote in my previous post, historically markets have bottomed even before the end of the bad news. Same would be the case here too. Stick to your method, there is no better alternative as long as the method has been tested and found to be something you can come to bear.
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