Ten days ago, when a U.S. drone strike killed an Iranian general, and days later, when the Iranians retaliated by firing missiles at military bases in Iraq where U.S. troops were housed, your investment portfolio probably wasn’t your first concern. But it was probably somewhere on your list of concerns.
With the drone attack happening right when Dynamic Asset Allocation called for a change toward the more aggressive side of the risk spectrum — from bonds to foreign stocks — did that give you pause?
Such events can rattle even experienced investors. After such a long bull market, some may worry that the market is practically looking for a reason to sell off. Sure enough, at one point after the missile attack, stock futures fell by more than 400 points.
It was a fearful time, with many wondering what may happen next. Could we end up in an all-out war? Fortunately, as night turned to day, no casualties were reported. As both sides struck more conciliatory tones, the relief was palpable. And the Dow responded accordingly, ending the day up 161 points.
As Mark noted in his post last week, the market’s reaction to the last 20 Middle East crisis events over the past 30 years, has been to rise 0.9% in the following month and gain 2.8% in the following three months.
Significant, sure-to-move-the-market events happen with some degree of regularity. So, in anticipation of the next one, it can be helpful to remember how long the market’s initial reaction has lasted following past events.
On Thursday, June 23, 2016, for example, English voters surprised the world by voting to leave the European Union (“Brexit”), sending Dow futures down by more than 700 points. With shockwaves continuing to reverberate, the Dow closed on Friday, June 24 down 611 points. The market then continued downward on Monday, June 27, falling another 260 points. However, just two weeks later, the Dow had erased all of those losses.
As Tuesday, November 8, 2016, turned into Wednesday, November 9, and it looked like Donald Trump would be elected president, Dow futures fell nearly 800 points. It was not what most people expected. But then investors caught their breath, took stock of Trump’s acceptance speech, and pushed the Dow to a 257-point gain by the close.
None of this is to suggest that bad or surprising news never has a more enduring impact. But it is to suggest — to remind all of us, really — that reacting to news headlines is not a winning strategy for stock market investing.
During good times, the market is often described as climbing a “wall of worry.” It seems there’s always something to fret about.
A better response
Just as volatile markets often reveal people’s true risk tolerance, they can also serve as a good time to review the following list, making sure you can say yes to each item.
Is prayer your first response to news that concerns you? I’m sure many people reading this prayed for the safety of our troops and wisdom for our country’s leaders when they heard about the drone strike and missile attack. That’s an appropriate response for our investing as well — to pray that God would help us not react in fear, that he would help us trust in his provision, and that he would give us wisdom in knowing what to do or not do.
Do you have at least some working knowledge of market history? As described in our September 2019 cover article, the market moves in cycles. It’s helpful to remember that bull markets tend to last longer than bear markets, and they tend to add more value than bear markets take away.
Do you understand how the strategy you’re using works? Could you explain it to a middle school student? Try it out. See if you can tell a 12-year-old how momentum works, and more specifically, how Fund Upgrading or Dynamic Asset Allocation works.
Is your strategy appropriate for your age, risk tolerance, and goals? If you’re using Fund Upgrading, Just-the-Basics, or Sector Rotation, make sure you have gone through SMI’s risk tolerance quiz. (Dynamic Asset Allocation does not require this, but it does require understanding that it's a more conservative strategy than Fund Upgrading.)
Does your strategy have a track record of delivering the level of returns you need to meet your goals? Remember, your best benchmark is the average annual return needed to accomplish your goals, which usually means that “the market” is not your best benchmark.
Is your strategy emotionally acceptable to you? That means you understand how it could be expected to perform under various market conditions and are good with that, and you’re willing to do what it takes to follow and stay with the strategy.
Could your spouse say yes to each of the previous questions? The importance of unity in your investment approach is especially seen during times of market stress.
Keep in mind that SMI’s strategies are not designed to respond to short-term market moves. They’re designed to keep you aligned with longer-term market trends. Being able to say yes to each of the above questions will go a long way toward keeping you aligned with your strategy of choice.