One of my favorite comic strips was Calvin and Hobbes. As you may recall, Calvin was a young boy and Hobbes was his toy stuffed tiger. At least, that’s what Hobbes appeared to be to other people. To Calvin, Hobbes was very much alive. The comic strip centered on their adventures and philosophical ruminations.
In one memorable piece, Calvin and Hobbes are flying down a hill in a little red wagon as Calvin waxes on about knowledge being overrated.
It’s true, Hobbes. Ignorance is bliss! Once you know things, you start seeing problems everywhere. And once you see problems, you feel like you ought to try to fix them. And fixing problems always seems to require personal change. And change means doing things that aren’t fun. I say phooey to that! But if you’re willfully stupid, you don’t know any better, so you can keep doing whatever you like.
As they barrel toward the edge of a cliff, Hobbes tries to warn Calvin, who closes his eyes and says, “I don’t want to know about it.”
Lying bruised and battered after the inevitable crash, Hobbes says, “I’m not sure I can stand so much bliss.” To which Calvin replies, “Careful! We don’t want to learn anything from this.”
After last week, when the S&P 500 lost four percent (but was down as much as -5.5% at one point), maybe you’re feeling a little bruised and battered as well. While the market didn’t exactly fall off a cliff, it might have felt that way. Last Wednesday’s 800+ point drop in the Dow Jones Industrial Index was the steepest single-day decline in eight months.
But unlike Calvin, it would be helpful to learn from the experience. As we’ve written before, there’s nothing like a downturn to find out if your risk tolerance is as strong as you assumed. Of the following three reactions to last week’s declines, where would you place yourself?
- "The market fell last week? I had no idea.” This would be the ideal reaction. It means you’re comfortable with your investment approach and check on your portfolio infrequently, perhaps just once a month when we update our strategies. Admittedly, though, this reaction is pretty unrealistic. You’d have to be well insulated to avoid hearing anything when the market is selling off sharply.
- "I sure don’t like it when the market falls, but I know it comes with the territory of investing in the stock market, so I made no changes to my portfolio.” This seems to have been the most common reaction among SMI members, based on the feedback we receive. No one enjoys seeing their portfolio balance decline sharply, but down days (and months and years) do, indeed, come with the territory of being a stock market investor.
- "I admit it. I couldn’t take the heat and sold some of my stock holdings.” If this describes you, your portfolio is likely not aligned with your true risk tolerance. However, especially if you have 10 or more years until retirement, it may be more profitable to develop thicker skin than to thin out the risk in your portfolio.
Three factors can help you take more of a steady-hand-on-the-wheel approach to investing.
1. Have faith. If you’ve bathed your investment decisions in prayer and sought Godly counsel in how you’re investing, those steps should provide peace of mind. And when the market tumbles, we would all do well to look to God before looking at our investment portfolios (1 Peter 5:7).
2. Know a little market history. One of the clear lessons from the history of the stock market is that the longer you stay invested, the better your chances of making money. On a daily basis, the odds that the market will generate a gain are about 50-50. But looking at 20-year historical holding periods, the odds of a positive return rise to nearly 100 percent. Two other important lessons are that: 1) The market cycles between bull markets and bear markets, and; 2) Bull markets have lasted longer than bear markets and they’ve added more value than bear markets have taken away.
So, expect short-term volatility and a long-term cycling between bull and bear markets.
3. Use a trustworthy strategy. Central to such a strategy is objectivity — having a time-tested, rules-based process for making investment decisions. As SMI members know, that’s exactly the approach taken in each SMI strategy.
How well did you navigate last week’s downturn and what did you learn from the experience?