Attention dog and cat owners: Petco is having a 30% off sale! If you happen to be in need of dog or cat food, or perhaps a new toy for your favorite pet friend, this might be a good time to consider checking out the Petco website. But before you do……
What does this notice have to do with your investment portfolio? This week I had a number of telephone calls from clients who are thinking of buying more stocks because the price for so many of them has been marked down by 15% to 20%….NOT!
Doesn’t it puzzle you that when a retailer offers a significant discount on merchandise it tends to bring shoppers into the store but when the same thing happens with stocks, hardly anyone pulls out their wallet and says “buy more”?
Of course I’m being a bit facetious. I know well that investor psychology is subject to the herd mentality. We have an ingrained survival gene that suggests that when others are scared, we too, should be scared. It’s true in the animal kingdom, too. When enough wildebeest plunge into a swollen river in their migration through East Africa, the entire herd usually follows suit, with many of them drowning before they reach the opposite shore.
And so it is and has always been with the stock market.
I’m not going to waste a lot of words here trying to convince you not to be uncomfortable with the fact that your portfolio has gone down in value. What I would invite you to ask yourself is: are you at risk of a permanent loss of capital? In my opinion none of the companies held in your portfolio are at risk of declaring bankruptcy and vacating the value of their common stock. Is Apple, off 30% from its all-time high, a failing enterprise? How about Goodyear tire? Take a look at the portfolio report that should be arriving in your mailbox today or Monday, and you will notice that none of the businesses that issued your stocks and bonds are in the headlines today. You pay me to assure they won’t be in the headlines tomorrow as companies that are in trouble! Instead, virtually all of your holdings generate free cash flow in excess of their expenses. This means they can cover their debt, pay dividends, buy back stock (which supports the price) and continue to grow the business. Why sell a perfectly good business just because some talking head on TV has a theory?
In every bull market that I have experienced (since 1981) investors tend to become complacent and expect their portfolios to move ever upward. In every bear market that I have experienced, a number of investors become victims of their own emotions and sell perfectly good businesses, usually near the bottom of the bear market cycle.
Most bear markets last less than one year, according to Ned Davis Research. There was an interesting article this week that talks about average and mean bear market behavior: It’s an official Ned Davis research defined bear market
It has been about eight months since the market peaked in late May 2015. If this is an average bear market, we are closer to the end than to the beginning. That being said, I’m nearly certain things will continue to be volatile for some time to come.
Let me remind you that clients who white knuckled it through the Great Recession bear market that ran from October 2007 to March 2009 enjoyed seeing their portfolios fully regain the peak 2007 value within less than two years of the 2009 low. Those who bailed out in mid to late 2008 (I had a couple of those folks) almost certainly hesitated and likely never went back into stocks. Their emotions cost them a big opportunity, having missed one of the longest running bull markets in history!
None-the-less, your portfolio is not dedicated exclusively to stocks. Let me remind you that you most likely have large cushion in the form of cash. It is always available to pay any bills that may arise so that you are not forced to sell anything at the wrong time. Further, for most clients have significant holdings of bonds and preferred stocks, paying regular fixed income. These have held their value, essentially untouched by the recent swoon in stock prices.
Please also remember that you have a veteran investment advisor with 40 years of experience under his belt, keeping an eye out for you. If your heart races as the media invoke deep tones of fear and feature pundits who postulate poor performance, I strongly urge you to take a deep breath and consider the long run success Trusted Financial Advisors has been able to achieve for its clients.
This too shall pass.