I ran across the chart below while reading an article about retirement plans. It quickly...
Wear Sunscreen & When to Worry About the Market
In 1999, Baz Lurhmann released the song “Everyone is Free (To Wear Sunscreen),” a song I still play for my kids every so often when we are all together. The song is basically a spoken word piece based on a hypothetical commencement speech. The song does include some very good advice for young people such as:
- Don’t be reckless with other people’s hearts, don’t put up with people who are reckless with yours
- Don’t feel guilty if you don’t know what you want to do with your life.
The most interesting people I know didn’t know at 22 what they wanted to do with their lives
Some of the most interesting 40-year-olds I know still don’t
- Don’t read beauty magazines, they only make you feel ugly
Why am I writing about a song? Well, the lyrics also include a passage that is very fitting for investors as well. They are, “Don’t worry about the future. Or worry, but know that worrying is as effective as trying to solve an algebra equation by chewing bubble gum. The real troubles in your life are apt to be things that never crossed your worried mind. The kind that blindsides you at 4 p.m. on some idle Tuesday.”
I am not suggesting people shouldn’t think or plan for the future. However, worrying about where the stock market is going or when it is going to crash is really like trying to solve an algebra equation by chewing bubble gum. Let’s just look at recent history. Recall the reasons the media has pushed as why you should worry about the stock market:
- The yield curve inverted, a recession is coming
- Interest rates were moving up
- The trade war
- Impeachment worries
Now these were all known and discussed ad nauseum by the media but the market continued to rise. Why? Because earnings were increasing. Then in late 2019 and January of 2020, the markets continued to move higher due to the trade war softening, impeachment worries dying (from a market perspective), and the economy looking solid. Should be a great time, right? Boom, the news that “blindsides you at 4:00 p.m. on some idle Tuesday” hits with the Coronavirus. The market as of Friday, January 31 actually lost all gains for the calendar year due to fears of the virus.
This really isn’t unusual. Very few market crashes were expected and many had unexpected news that helped cause them. The Black Monday in October 1987, when the S&P 500 dropped 22% in one day caught the entire global markets off guard. The reason for the drop is most often credited to program trading. September 11, 2001 terrorist attack the caused the market to drop 23% in 2002 (source Macrotrends).
Even in 2008, it was the unexpected news (at least to the public) of Lehman Brothers collapsing that caused a correction to turn into the great recession.
One of the best lessons anyone can learn about investing is no one can time the market on a consistent basis. You have “experts” claiming to have called the 2008 crash but what they don’t tell you is they called the 2004, 2005, 2006, 2009, 2013, 2019 crashes also, even though the markets were up in all those years. They are proof to the old adage “even a broken clock is right twice a day.”
The real question is NOT when the next market correction or crash will happen. No one knows. Is the coronavirus the start of the next correction or even crash? No one knows how bad this issue will or will not get. If you are really worried, the question isn’t about the virus, the question is are you taking too much risk? Why are you worried if you understand the risk you are taking in your portfolio? You can’t control the markets, you can’t time them, so what can you do? You can make sure you know the possible loss in your portfolio if the market were to drop 25% tomorrow and then make sure it doesn’t destroy either your shorter or longer-term goals.
The real worry is: does the average investor really understand the risk they are taking with their money and the possible consequences of not knowing?
If you don’t know the answer to that, then let us help you find it out. You can start by taking our quiz here – a quantitative way to pinpoint your risk level. Or contact us to schedule a meeting with one of our advisors today.
Following is a link on YouTube to the song referenced in the beginning of this article if you’d like to hear the entire song and all its clever advice.