A Market Meltdown, Merry Christmas

 
 

The value of the investment marketplace where your money is located has fallen 20%. The number 20% is important. A decline of 20% or more is what industry professionals refer to as a "bear market". A "bear market" simply means "the bad kind" of a market fluctuation. This time around the threshold for correction territory happens to fall on Christmas eve.

Decembers in Canada reliably bring back two things: beautiful white snow and horrible drivers. It appears the first snowfall each year erases the public's memory of how to operate a vehicle.

What is it about changing seasons that spreads such state of panic? Some cite caution, some cite incompetence. Regardless of the cause the outcome will fall somewhere between road rage and late arrivals.

For those of us not content to sit in traffic, such circumstances require taking fate into our own hands. Disobeying speed limits, taking shortcuts and changing to the faster lane become the new normal. Why adjust our expectations for how long the drive will take when we can simply increase our aggression?

For the active driver, the logic seems flawless. That is, until the inevitable happens. After 5 minutes of speeding, passing and cutting people off the elderly woman you passed 5 minutes ago, who was hardly even driving at all, now passes you. How could this be?? All the wasted effort, safety risk and burnt fuel just to be deemed less efficient in traffic by someone who wouldn't be able to pass a 21st century driver's test. We face the realization that maybe the wasted fuel and additional risk clearly provided no benefit. Maybe at the end of the day we are the bad driver.

Maybe the right strategy would have been been to notify your friends you'd be late, adjust your expectations and put on your favorite song while you sit in traffic for the next 40 minutes. At least that way you relieve yourself of the driving stress and at best you'll avoid self sabotage.

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Remember that marketplace we mentioned before? The one that is down 20%? The tool used to measure that marketplace is called the S&P 500. The data back to 1927 shows this marketplace is in "bear market territory" 23.1% of the time.

Do you know what else exists about a 23.1% of the time? Winter. Just like our climate, the investment markets are seasonal. They move from Summer, to Fall, to Winter, to Spring. And just like Canadian winters guarantee snow and bad drivers "Bear markets" guarantee falling prices and bad investors. Bad investors commit the same errors. Without fail every winter they change into the lane that's moving faster, they give up their route and seek shortcuts, they fail to adjust expectations and find solace in a comfortable lie.

Except this time, the stakes aren't simply a late appointment. The stakes are our future livelihood, our retirement or our children's education. In the markets, the cost of a mismanaged winter is not road rage, it's our future ideal.

In December of 2018 we find ourselves coming out of a long, beautiful, flawless, Summer. In fact, this past Summer lasted almost 10 years, one of the best on record. Beautiful temperatures, beaches and green grass were the norm. But long Summers too must end. 

In the chart below, the Red line shows the Volatility Index. The black line shows the value of the investment marketplace. You can think of the Red as "Winter" and the Black line as "Summer".

We had a tough winter in the early 2000's and a terrible winter in 2008. But since then, we've had nothing but Summer with a few brief showers. Being an investor from 2012 to 2018 has been a piece of cake. Now we're seeing signs of Fall. 

So as we prepare for winter what can we learn from overly active drivers?

Stay put, adjust your expectations and enjoy the ride. Maybe even make the most of it. If you manage yourself well through the Winter, you set yourself up for a fantastic summer. 

Josh Olfert

 
Josh Olfert