Behavioral Finance "Everyone has a plan" -Tyson

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19 Investing Observations Through the COVID-19 Bear Market

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“Everybody has a plan until they get punched in the mouth” is an often-used maxim by former heavyweight champion “Iron” Mike Tyson. This saying can be rationalized that It’s how you react to adversity that defines you, not the adversity itself, whether you suffer a blow from the stock market, your job, a health issue or any sort of traffic jam in life.

Getting a bit more metaphysical, investing is both an art and a science. It’s in as much as what is “in your head” as what is in your portfolio. If your portfolio is greatly down and your stress level is up during a crash, the issue may be that you are

  • In over your head and overweight equities and risk
  • Under-diversified between stocks, sectors and asset classes
  • Not investing with a defined plan and parameters in place

Even if your portfolio is performing satisfactorily, it still takes effort to quell the “voices in your head” and not to “knock yourself” out financially (theoretically.)

Investor psychology 

Quarantined at home with nothing better to do than to watch 24/7 disturbing financial news shows covering the peaking pandemic and plunging stock market can encourage investors of all ages to get off their couch and suddenly take swift and substantial actions with their money at exactly the wrong time.

Headlines remarking that the “Coronavirus crisis freezes U.S. economy as retail sales plunge” (Market watch) in addition to many articles mulling over the record 22 million job losses over the past month while mortality rates are increasing, can cause anyone to feel they got hit in the head by Tyson.

We hope the following observations, thoughts and quotes may help you to look at some financial and economic numbers with a fresh perspective and provide some direction to a more disciplined investment savings and management approach.

 19 Timely Investing Observations and Quotes:

  1. Watch the quants: Investor sentiment can be a significant driver of the stock market, yet a good portion of trades are placed by quants and algorithms in extreme market conditions magnifying both stock velocity and human condition in either direction. Deep learning computers are now reading tweets and the news overnight while you have been sleeping and are trading away. While money never sleeps, perhaps neither do robots.
  2. Stocks and earnings do not seem to always travel in the same direction with stocks ignoring dismal economic forecasts and bleak data as traders find solace in the Fed “life support” money and optimism in opening America. As Benjamin Graham eloquently observed, “in the short run, the market is a voting machine. In the long run, it is a weighing machine.”
  3. Fundamental analysis and the basics of economic evaluation seem to matter less when the market is cycling down (while sometimes up) during a pullback as there are other factors that move the market, some of which appear to be “canceling out” bad and good news.
  4. Fear and greed are magnified in bear markets – as some people get a bit too overconfident while others panic, both operating on emotion – not strategy or process. You may make most of your money in a bear market, but you may not recognize it at the time.
  5. The “experts” and financial pundits on the news are only providing an opinion, and do not have a working crystal ball any better than you. Goes along my favorite adage that “he who lives by the crystal ball is destined to eat ground glass.”
  6. If you wait for happy headlines or hopeful government statistics for a clue for when to pounce, you’ll be too late. Stocks typically rally before a recession is over or rebound quickly as we saw a huge rally by US stocks as noted by the S&P 500 index in the last half of ’09.
  7. Look for patterns: In the market, like life, it’s essential to look for patterns. Bear markets do not last forever and neither do bulls, which provides visible opportunity to buy low and high- like buying hurricane equipment and window treatments in winter months. Yet investors seem to never follow course.
  8. Know your IPS: Rebalancing, asset allocation diversification and dollar cost averaging according to your IPS (investor policy statement) – are all methods to unemotionally “stay the course” to buy low and sell high automatically.
  9. Develop a process: Process helps to keep us disciplined, focused, rational and unemotional, when the rest of the world is not. Our firm’s core maxim is that “performance without process is just luck.”
  10. Market timing is a fool’s game: Trying to pick the bottom of a bear market is even more hazardous to your wealth. Peter Lynch theorized that “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”
  11. Patience is a key ingredient: Checking your money around the clock is like opening the door to the oven every 10 minutes when you are baking cookies and letting the heat out. Investing should be more like watching paint dry or watching grass grow. As noted by Paul Samuelson, if you want excitement, take $800 and go to Las Vegas.
  12. Know your indicators: The stock market is what is known as a leading economic indicator. This is a measure of economic recovery that indicates progress and recovery before the actual economy does.
  13. What’s your Investor IQ? Everyone thinks they are a “genius” in a bull market, but when it is down… they may find that they are not as smart as they thought. There is no direct correlation between your age, job, status and “intelligence IQ” and your “investor IQ.” As Charlie Munger justified “a lot of people with high IQs are terrible investors because they’ve got terrible temperaments. You need to keep raw, irrational emotion under control.”
  14. Listen to the Baron: Buying low is easier said than done. Baron Rothschild, an 18th-century British nobleman and member of the Rothschild banking family, is credited with saying that “the time to buy is when there’s blood in the streets.” He should know. Rothschild made a fortune buying in the panic that followed the Battle of Waterloo against Napoleon.
  15. Sir John Templeton once commented that “the four most expensive words in the English language are ‘this time it’s different.” Yet we have discussed in past blogs that each crash and recovery is ALWAYS different (like a snowflake), but human behavior seems NEVER to be different from investor behavior surveys showing how many people greatly under perform the markets and their own expectations.
  16. Don’t derail yourself: In the end, we remind ourselves and investors that we need to get out of our own way. Benjamin Graham noted in his book The Intelligent Investor that “The investor’s chief problem—and his worst enemy—is likely to be himself. In the end, how your investments behave is much less important than how you behave.”
  17. Don’t invest based on headlines or social media comments, invest based on your financial plan. For decades investing legend Bob Farrell, a top Wall Street strategist known for predicting changes in overall stock market direction notably said “When all the experts and forecasts agree, something else is going to happen.”
  18. Optical Illusion: Even with the huge DJIA index 20%+ rally at the top of April, the market has only retraced 45% of the 34% low point of18,591 on March 23rd and is still treading around bear territory. Consider if you lose half your money you need to double what you have left to get back to even. It’s like an optical illusion in the fact it’s easier to lose than gain money.
  19. Shocking: This “man-made” recession was initiated by literally (and amazingly) shutting down the United States when we were operating at full capacity. This caused a harsh fiscal reaction, like an exogenous shock to the system. As 70% of U.S. GDP is consumer driven, even if America is “turned back on” by Memorial day, the millions of people who filed for unemployment thus far (over 17% of the labor force) may be the canary in the coalmine to deter a speedy economic recovery.

Jon here.

Wealth planning based on your IPS (investor policy statement) should define your LONG-TERM goals and short-term actions. Has your advisor asked you – or have you asked yourself: when the market is down, what is my game plan? With many people now experiencing a retirement longer than their working years, holistic planning is essential.

Once you have a financial plan, stick to it! How you manage your plan, portfolio, personal finances and emotional mindset in the short term through a bear market “down-cycle” can greatly affect your financial health and well-being for the long run before and through your golden years.

Working with an accredited financial advisor, such as a CFP® pro can help you to navigate your money and retirement through the eye of the hurricane and beyond.

For more information on our firm or to get in touch with Jon Ulin, CFP®, please call us at (561) 210-7887 or email [email protected]Get Started Today.

You cannot invest directly in an index. Past performance is no guarantee of future returns. Diversification does not ensure a profit or guarantee against loss.

The information given herein is taken from sources that IFP Advisors, LLC, dba Independent Financial Partners (IFP), IFP Securities LLC, dba Independent Financial Partners (IFP), and its advisors believe to be reliable, but it is not guaranteed by us as to accuracy or completeness. This is for informational purposes only and in no event should be construed as an offer to sell or solicitation of an offer to buy any securities or products. Please consult your tax and/or legal advisor before implementing any tax and/or legal related strategies mentioned in this publication as IFP does not provide tax and/or legal advice. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. This report may not be reproduced, distributed, or published by any person for any purpose without Ulin & Co. Wealth Management’s or IFP’s express prior written consent.

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