How to survive the current behavior of markets
Let us dispense with the obvious. No matter how hard one tries, there is no denying that the current behavior of markets is a gut check for investors, the public and the markets themselves. For more than two years, we have been sailing through one storm after another of collective events due to synthetically low interest rates and easy money. We have experienced a deadly global pandemic, the first major land war in Europe since the end of World War II (which is threatening global food markets), increasing political polarization, a heavyweight punch of inflation after decades of disinflation and deflation, global climate change consequences and even a baby formula supply shortage.
One punch after another is a lot to handle, and it is accompanied by a historical simultaneous drop in valuations of stocks and bonds. There is no point in listing potential silver linings in this environment, because what is happening now reinforces strengths and vulnerabilities we face personally and collectively.
In a recent entry on his Wealth of Common Sense blog, Ben Carlson of Ritholtz Wealth Management debunks the myth of the alpha investor (often heralded on business cable channels) who can plow through the waves of turmoil and profit with perfectly timed moves. It may happen occasionally, Carlson writes, but the reality for most of us is much more sobering.
“For the rest of us, success looks more like survival. Those investors who can survive their own mistakes, avoid blowing themselves up, and generally stick to a reasonable investment process have a higher probability of success in the markets,” Carlson wrote. “Survival is even more important during down markets. In down markets, investors start pressing, doing more, trying to time the market and opening themselves up to avoidable risks.”
Survival does not mean passivity. Here are a few timely recommendations:
• Take care of yourself, physically and mentally
• Eat well and exercise
• Sleep well
• Take comfort in the bounty of family and friends and express gratitude
• Limit the fire hose of daily disturbing news.
Being aware does not mean being in the thrall of daily headlines.
Rudyard Kipling had it right in the opening lines of his famous poem “If” when he noted, “If you can keep your head when all about you are losing theirs and blaming it on you…”
It is not easy, but there are many his torical lessons about the importance of turning survival into a long-term strategy. More than five decades after “If” was published, Kipling’s Great Britain faced an existential threat to its very existence during the aerial Battle of Britain beginning in the fall of 1940. The Royal Air Force could not defeat Nazi Germany at that time in World War II, so it developed a strategy of not losing, of leveraging its advantages (radar, better airplanes, the courage of its pilots and the incredible morale of the public) and forcing the Germans to change their goals despite their overwhelming material advantages. The country suffered immense sacrifices of death and destruction, but Great Britain “won” the battle by not losing their collective heads, maximizing pluck and creating its own luck. As Churchill famously said, “Never let a good crisis go to waste.”
Our plight is not as dire, of course. But it is challenging after a decade of seemingly clear sailing and automatic doubledigit returns. When it comes to inflation and markets, we are seeing a regression to the mean — or in less prosaic terms, what goes up, always comes down. No one has a crystal ball for this environment but there will likely be a surplus of experts who will dust off past predictions and present them as shiny new objects of adoration.
In addition to taking care of your health, we also recommend reassessing your cash flow by taking a critical inventory of wants and needs and calmly assessing your own levels of risk. The storm is real, but we do have a choice not to lose our heads while it’s happening.
And if you are looking for perspective, we strongly recommend reading renowned political scientist Ian Bremmer’s newest book: “The Power of Crisis: How Three Threats – And Our Response – Will Change the World.”
Tom Sedoric is partner, executive managing director and wealth manager and D. Casey Snyder is partner, senior vice president and wealth manager of The Sedoric Group of Steward Partners in Portsmouth. They can be reached at thesedoricgroup.com.
