It’s the stock markets fearful times that can kill us – if we let them

The reality is we need to ‘get over it’, understand that it happens and deal with it if we are to trade the stock market successfully. ‘Shit’ events happen every 10 or 20 years of thereabouts, there is no hard and fast rule. They come in all shapes, sizes, and periods over which they occur. We never know when they’ll creep up on us, but we know they will. So, we must build them into our expectations and find a good way of dealing with them with a trade plan that can withstand the pressure. We must expect it to happen because they do.

Dow Jones Industrial Average

1929-1932 65%

1937-1938 47%

1946-1949 35%

1966-1982 72%

1987-1987 32%

1999-2002 38%

2007-2009 50%

2020-20?? 36% to Mar 2020

So, in your lifetime you are likely to experience 3 or maybe 4 stock market declines of say 35-60%. If you are 60 years old, you will have experienced 4 major declines including the current one which is 36%, so far. Apart from 1966-1982 all have been relatively sharp, but the reality is we don’t know how long they will go on for.

I am trying to paint a picture of reality. Over the long-term, say 100 years, the share market has returned better than property and the returns have been good. That’s if we live 100 years, unlikely, and then how long are you actually invested in the stock market. 10, 15 or 20 years? Let’s say it returned 10% GAGR and that’s great we say, but then again this may depend on the last 2, 5 or 10 years which is what we normally measure our expectations against. Like now Property has boomed in Melbourne and Sydney. Is that a good benchmark? If only I had five houses! The periods we live through and the periods we are invested in stocks or property affect our expectations. Don’t you love the advisor who tells us shares have returned better than 10% CAGR since 1900. And then we live through a bear market like 1966 to 1982 or 2020 to ??. We don’t know what’s ahead nor do we live, nor are we invested for 100 years. That’s reality. And these days our time frame is probably shorter than it was say 50 years ago. But having said all that, we can, and should be prepared no matter the shape of any correction or bear market.

So, we have to understand that there must be an engagement plan to counter these forces if we are to invest in the stock market. One option is to sit through it and ride the downswing, without knowing how far it will fall like 2007/08 or the length like 1966-1982, or how long it will take to recover. For Australian investors the market has only recently recovered the highs hit on 2007 basis the ASX/200. The idea for those types of ‘long term’ investors was to rebuild some portfolio value during this slow climb back if you have the money and the gumption. It’s a difficult choice but again this is the reality. Some retires couldn’t afford to wait and they paid a price.

The ASX Accumulation Index is a far better measure for those that ‘buy and hold’ as it includes dividends which these investors will receive, and that took about five years to recover its highs. A better result. See chart below. The great thing about the Aussie stock market is that yields can be quite strong especially when interest rates aren’t attractive and that can cushion the pain of shrinking growth. So that can be a way but it’s hard and ‘hopeful’ work and again we are left still with the question of how deep and how long and do we ‘carry’ through. We never know what’s ahead. We can take that element of doubt out of the equation. One of the five fundamental truths of trading is you don’t need to know what’s going to happen next to make money. Too true, we don’t, and we can’t – but we can still make money. The recent fall has brought us quickly back to reality again after an 11-year upswing. Yes, it’s an ongoing challenge.

Then there is the other option. Most of you know how I think, and work and that I prefer an alternative strategy, that admittedly is not without its pain, but I know it can offer better returns in the long run and really, it’s a safety net for our capital and that’s important. We really don’t know the extent or length the current bear market will carry us. Do we want or need to be exposed to the unknown? Emphatically, no!

The portfolios that I’ve run for 17 years prove that but then the questions arise again of your time window. How long are you in it for and what and what has your time window produced? For the last two years, up to today, not much, it’s been a hard toil (mini crash in second half of 2018 didn’t help), but then again neither has the buy and hold. The recent drop has cancelled out most of the gains as we head back to 2016 levels as of this week. Using my 10-15% stop policy it has prevented complete exposure to this drop as slippage and the speed of this drop has caused some stops to go off at more like 25%, not all but many – yes back to reality. But there have also been some profits to balance this, good profits along the way – locked in – and this has reduced our overall losses to more like 15%. Still well ahead of the market fall. So, there is some joy there.

As the slide continues and fear grips the market, we are in a neutral position which makes us feel safe and psychologically prepared for the next stage. Cash is not offering a lot like in 2007/08 but at least the cash pile is not shrinking. The strategy does not expose us to time,1966-82, or depth, 1929-1932 or 2007/08. We have the time and the patience to wait for the inevitable upturn, which will be based on foundations built, accumulation or new/fresh buying and setups or signals that tell us new up trends are likely to start again. The shape, size, and extent will remain a mystery but even so under that guise a solid trade plan will direct us through the shark infested waters of the stock market. So, let’s not forget the good times, 2003-06, 2012-15 and 2017 2018. Trends will continue to develop in the stock market and that’s fact. It’s like buying the fear and selling the greed it always works.

Perspective, reality, panic, fear, expectations are just some of the emotions we endure. We counter these forces with focus, control and discipline. Profits will follow as bear markets or crashes of this nature very much focus us on what’s important and what’s necessary to win. When the market climbs back the key is no not get lazy and comfortable but remember the bear will be back again so make sure you’re prepared for the next time and you will then be safe.