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Mar 27, 201812:53 PMFinancial Perspectives

with Michael Dubis, CFP

Build your financial plan with strategies, not stories

(page 1 of 2)

Last year was not a normal year. In some measures, it had been decades since a year like 2017 occurred in terms of low U.S. stock market volatility.

Since the first of the year, the stock markets have certainly resumed their level of normalcy in terms of volatility. This past week we saw another big swing in markets. I’m sure some investors don’t like it, but it’s the reality of investing.

Perspective matters. For example, if given two options, which would you prefer?

The market:

  1. Drops 700 points, or
  2. Goes down by only 2.5%.

This is a trick question since they’re essentially the same thing in today’s markets. This happened in early February to the Dow Jones industrial average and happened again just this month. This may seem like a big deal but it’s not.

It’s really important to frame the stories you hear correctly so you don’t succumb to emotional reactions with your long-term wealth. The media in their devilish ways highlight, “700 points! Look out!” to inspire fear, which then inspires you to tune into their channels so you can listen to their often ridiculously and generally disingenuous dribble.

They offer little in terms of solutions, but a lot of inspiring “feelings.”

Notably volatility like February and March feels like a lot because the last time such high volatility showed up was about two years ago. To put the early-February or late-March market movement in perspective, if a 665–700 point drop happened two years ago at the Dow Jones industrial average levels then it would have meant an almost 4–5% swing on the market; however, today that same number is only 2–2.5%, and 2.5% is hardly unexpected.

Today’s volatility, albeit not enjoyable, is a statistically expected experience in any given year. While newsworthy, it should not be something you need to react to.

Historically speaking, movements of 1–2% (yes, today that means about 250–500 points) should be expected in any given year. That alone should be enough to appreciate that what has been going on in the first quarter of 2018 is not just normal, but should have been expected a long time ago.

It’s quite common for annual market pullbacks well north of 10%. The average intra-year pullback is about 13–14%, yet the market over time is upward sloping — “investing for the long-term” is a repeated mantra for good reason.

The probability of a bear market or pull back in a long-term portfolio is basically a certainty in an long-term investor’s lifetime, but the probability of predicting when — and then exploiting it profitably — is likely zero.

Long-term means long like decades, not simply years.

Planning is all about preparation, controlling for what you can control, and building reasonable expectations around what you can’t control.

Because of all of this, I repeat two sensible recommendations on a regular basis:

  1. Don’t drive decisions with emotions or bad behavior. The serious risks all wealth faces are inflation, deflation, confiscation, devastation, and bad behavior. We can diversify to partially offset inflation and deflation. We are fortunate to live in a country where confiscation and devastation are unlikely, or at least usually insurable. Only you can control your behavior, so practice good saving, control spending, take care of insurance and estate planning, and keep your emotions in check.
  2. Strategy should drive investing, not acting on rhetoric or stories. Most everything you watch on TV, read in retail publications, glean as a “tip” from friends or people you network with, or “hear about” (especially if it’s free!) are rhetoric and stories looking to extract wealth from you rather than build it. “Strategies” are designed to build wealth for you; “stories” are often designed to transfer wealth away from you. Know the difference!

There is no certainty in the world. Markets don’t care about your feelings, goals, or perception of things. You need to know about them though. So get your perspective of those things straight and your plans back under your control, so your perspective on the markets can be sensible and informed.


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About This Blog

It is an understatement to say the world has experienced a radical shift in capital markets. There are more layers of information and opinions on the direction of the world than we've seen in decades. The internet and the media do not always make it easier, but Michael Dubis' contribution through IB blogs will help you sift through the noise and give you some perspective. You can find his company online.

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