While it seems like things have never been the way they are right now, this excerpt from Ron Blue's 1994 book Storm Shelter reminds us that "What has been will be again, what has been done will be done again; there is nothing new under the sun" (Ecc 1:9). Ron points out that while economic uncertainty is certain, God's principles are adequate for our protection. They've been tested through the centuries and never found wanting.
The picture is as clear in my mind as it was nearly thirteen years ago. As I pulled off the interstate en route to my office, I did not see the road markers; instead my eyes swam with the signs of the times.
The year was 1982. Interest and inflation rates had soared to all-time highs, investors faced crushing 70 percent tax brackets, and the price of gold leapfrogged daily. Taking stock of the situation, most analysts warned of a devastating financial explosion within the next few years.
As I drove to work that day, the economic consequences seemed both crippling and inevitable. I had just launched our investment and financial counseling firm. How, I wondered, were we supposed to respond to the clients who came to us for advice? Could anyone afford to purchase a home with 15 to 20 percent interest rates? Which kinds of investments and tax plans could stand up to double-digit inflation? And if the predicted monetary collapse did occur, would the resulting political turmoil uproot even the best-laid financial plans?
One of my fears as I navigated the interstate highway that day was that we faced a "worst-ever"? economic climate. Yet economic uncertainty - and its accompanying effects on our sense of security and well-being - are nothing new.
Ten years earlier, in 1972, we had been saddled with Watergate and an oil crisis that threatened to throttle the world's economy. Who can forget the lines at the gas stations or the rationing of fuel oil that winter? Then, too, I remember being hit with wage and price controls for the first time since World War II. And for the first time in my memory, the prime rate hit ten percent. Economic security seemed an elusive, if not impossible, dream.
Ten years before that, in 1962, the specter of economic and political uncertainty had hovered in every corner of the world. Our amazement at seeing a shoe-pounding Nikita Khrushchev vow to "bury"? us turned to horror as the Cuban missile crisis unfolded. At that point a nuclear holocaust seemed at least possible, if not imminent. And Vietnam lay just around the corner . . .
In 1952, in the shadow of the spread of Communism, amid the mud and blood of the Korean War, bomb shelters were among the best-selling items in the United States. In 1942, we faced Pearl Harbor and felt the full force of our entry into World War II. In 1932 we awoke to the nightmare of the Great Depression. And on and on and on. The point is that we will always face uncertainty.
Suddenly, I felt the subconscious click of the proverbial light bulb: The biblical principles of money management I had been teaching and using for years would work under any economic scenario. Armed with these concepts, I knew exactly how to help our clients weather the coming storm, no matter how hard the financial winds blew.
The predicted financial blowout never did occur. Yet as our business grew in the years that followed, we faced a thousand different financial situations that seemed specially tailored to test the worth and endurance of the money-management concepts our firm espoused. But in each and every case the biblical principles held fast, strengthening our clients' economic positions - and bringing them peace and security in the bargain.
You see, it's easy to make a case that this time is different. But friends, just as you should not "grieve like the rest of men, who have no hope" (1 Thess. 4:13), neither should you be fearful like the rest of men who have no heavenly Father who has promised to "meet all your needs according to his glorious riches in Christ Jesus" (Phil. 4:19). So, keep praying, that the Father "may give you the Spirit of wisdom and revelation, so that you may know Him better" (Eph.1:17).
[Originally posted on our Member's Blog on 08/05/2011]
How did you hold up yesterday? Yesterday was a good example of panic selling. Don Hays offered this morning that the volume of declining stocks was 82 times that of advancing stocks on the Nasdaq index yesterday. That's extreme. So if you weathered yesterday pretty well emotionally, it's a good sign.
I think the reason people are so fearful right now is because things feel so out of control. Government seems to be making lots of decisions, but few of them seem like really good ones. We keep hearing that the economy is broken (though we're a long way from bread lines and shanty towns). We've been burned by the stock market twice in the past decade and people are worried that we're out of bullets to deal with another crisis. Things just feel unstable.
Maybe you feel this way. If so, I'm not going to tell you that everything is fine and you don't need to be concerned. Nobody knows what the future holds. It is possible financial panic is around the corner. As much as we'd like to, it's almost impossible to ever completely rule that out.
But before making the leap of (negative) faith (also known as worry) to that conclusion, let's ponder a less dramatic scenario.
Since 1928, there have been 26 bull markets, including the one we're currently/recently in. As this post from seekingalpha.com stated on April 26, just a few days before the market peaked, this current/recent bull was very close to the middle of the pack in terms of both length and total gains. A little over two years and right around a 100% gain. Very normal.
All of that is fine, but if the bull market length and duration we just experienced was normal, it stands to reason that hitting a bear market after that point would also be quite normal, right?
This isn't an argument to say we have flipped over and this will develop into a bear market. I don't know if that's the case at this point or not, and neither does anyone else.
Rather, the point I'm trying to make today is that even if this is the beginning of a new bear market, it doesn't necessarily mean this bear market is going to be catastrophic or historic. It could just be a "run of the mill" bear, in the same way that the last bull was fairly "normal".
And it could be that it's happening not because the world is about to end, but because this is what the market does. It cycles between bull markets and bear markets. I hope you understand that if you're going to be an investor over the span of multiple decades, you're going to have to weather a number of bear markets. Some will be longer and deeper than others. But they're going to happen.
You know what else? They're normal. That should be some comfort. You don't need to worry about them or freak out when they finally do arrive. Sure they're unpleasant, but so is getting your teeth cleaned at the dentist. You still do it (I hope). They're basically the equivalent of investing winter, and they come around just like the seasons.
A lot of today's investors came of age during the extended bull market of 1982-1999. That bull market was by far the exception to the rule. (And in fairness, even that bull market technically had a mini-bear in there. Remember 1987? The worst single day for the stock market ever when it plunged nearly 23% in a single day. Makes yesterday look like a picnic.)
Hopefully it's some comfort to take a deep breath and recognize that a bear market every 3-4 years is about the historical average. It depends on how you slice and dice the data, but that's more or less been the average over the past century. If this is a new bear, which I'm not quite ready to concede, it will be our third in twelve years. Hmm. Dare we say, not all that abnormal? That the first two were a bit more severe than average shouldn't be a huge shock, given the massive bull market that preceded them, and the fact that the last one coincided with a banking crisis, which is unusual and not in a good way.
As you go about your weekend, try not to worry about the market. Life is more than the food we eat and the clothes we wear, and our Father knows our needs and promises to meet them. (That may sound familiar, I didn't come up with it myself.) It could be that next week will be wild and nasty. But it might not be. It could also be that this is a correction that doesn't ever develop into a bear market, in which case you'll forget about this little blip faster than you can imagine. After all, how often do you think about last summer's correction? It was worse than this year's has been so far.
As always, we encourage you to stick with your long-term investing plan. Hopefully you followed our advice and developed one long ago at a time when your emotions weren't screaming at you. Trust that version of yourself — I can almost guarantee he/she is a better information processor and decision-maker than the version that's feeling panicky today.
[For more about a membership to Sound Mind Investing, click here]
Here's another short commentary from SMI founder and publisher Austin Pryor. Today, Austin explains why an investing approach based on trying to time the ups and downs of the market is rarely successful over the long haul.
To listen, click the arrow on the player below (1:10).
(If the audio player won't work for you, click here.)
Learn more about why timing the market is so difficult by reading Austin's recent article, The Realities of Market Timing.
Over the past month or two, I've mentioned several times in conversations that the market was "overdue" for some sort of pullback. What impact has that had on my personal investing, or the information we've discussed here and in the Sound Mind Investing newsletter? Absolutely none.
Confused? Let me explain. As the chart below shows, we are currently in the sixth decline of at least 5% since the current bull market began two years ago.
Surprised? It only seems like the market has gone straight up for the past two years. In reality, these minor pullbacks happen quite often. Think of them as "the pause that refreshes." Two steps forward and one step back is absolutely normal behavior for the stock market.
Now if you look at this chart and the frequency of these pullbacks, what stands out? Notice the length of the uninterrupted blue line from Sep-10 to Mar-11. Big gains over an extended period without a significant pullback. That simple fact is what has made me feel like some sort of pullback was likely before too long.
If that's true though, then why not do something about it? Well, the main reason is that I just don't have any confidence in our ability to play "the trading game" successfully. Those short-term movements aren't what we're about. It's difficult to know when these pullbacks are coming (note the variation in length between them). And the consequences of riding them out are pretty insignificant (note the overall rising line of the chart, despite these relatively frequent pullbacks).
Here's some analysis from Birinyi Associates, who created the chart (hat tip to The Big Picture, where I saw it):
What is perhaps more encouraging is the fact that 5% declines do not usually result in a further 10% decline, and a bear market is even less likely. An initial 5% decline, such as the one beginning on 2/18/11, only results in a correction (10% decline) 33% of the time, and in only 11 of 106 instances has a 5% decline turned out to be a bull market top.
It's common sense that all bear markets start with a drop of 5%. But only 10% of those 5% drops turn into bear markets. The other 90% don't. Two-thirds of them don't even continue on to 10% official correction territory.
So while last week was a tough week and some people are understandably nervous, there really isn't anything at this point to suggest this is more than a normal pullback within a continuing bull market. In fact, I would go as far as to suggest that even if the horrendous earthquake in Japan hadn't happened, the market would have still found a reason/excuse to sell off by 5% or so soon. It's just the nature of the market.
Concerned about how the Japanese earthquake, rising oil prices, or Middle East turmoil may affect your investments? You're certainly not alone!
Today for our Personal Finance Friday post, Sound Mind Investing founder and publisher Austin Pryor presents a brief audio commentary on what to do when the news of the day seems particularly unsettling.
To listen, click the arrow on the player below (2:00).
"So how should one manage money in an era of unpredictability and volatility?" asks a story on the front page of today's "Money" section in USA Today.
The Dow Jones industrials' 261-point plunge Friday sparked by a sharp drop in consumer sentiment in July highlights that gloominess persists....
In recent weeks, a spate of economic reports have come in weaker than expected, fueling double-dip fears. In July, readings on manufacturing, retail sales, factory orders, employment, auto and home sales came in light. Last Wednesday, minutes of the Federal Reserve's June meeting indicated it expects growth to slow in the second half, prompting the central bank to lower its 2010 growth outlook to as low as 3%.
In the words of former Fed chief Alan Greenspan, the economy has hit an "invisible wall."
Whew! How should investors respond?
On a recent Faith Meeting House program on Alabama's Faith Radio, SMI assistant editor Joseph Slife (right) talked with host Bob Crittenden about the maintaining a long-term perspective when the short-term is unsettling.
Use the audio player below to listen (16 min.) — or download an mp3 (Windows users: right click, then "save link as").
The amount of fear in the market lately has been tremendous. That's a significant signal. Analyst Don Hays says the market has reached this level of fear (as indicated by certain tracking indicators) only seven times in the past 24 years! And guess what? Each of those times "produced outstanding investment junctures over the next 6-30 months." In other words, the high level of fear signaled significant buying opportunities.
That may not be the case this time around. No one knows. Perhaps past precedents no longer apply. But that always seems to be the case when fear reaches these levels. It's why seasoned investors regard "It's different this time" as four very dangerous words.
There are two primary ways to invest successfully in the stock market over time. One is to be an extremely nimble trader — which is exceptionally difficult. The other is to be a long-term investor. That's not easy either, but for a different reason.
The reason making money as a long-term investor is tough is that it requires an investor to ignore times of fear such as we're going through right now. You have to stay the course when others panic. Moreover, taking a long-term approach suggests that you should lean into the wind and be a buyer at times like these. No easy task.
Which game are you playing? The short-term trading game? Or the long-term investing game? Like it or not, you can't straddle the line between the two. If the urge to do so is overwhelming, maybe your asset allocation is tilted toward a greater level of risk than your true risk tolerance is willing to permit.
Knowing what it takes to succeed as a long-term investor is what drives me to keep putting money in the market despite current fear and volatility. For all I know, this market may keep going down for awhile. But even in that scenario, I'm still comfortable — okay, that's not the right word — maybe committed? — to a course that says, "This is my long-term risk capital, and I'm going to keep it working in the market."
Sure, I'll occasionally be wrong following this approach. But if history is any guide, I'll be right more than wrong and come out ahead in the end.
Don't yet have a long-term investing plan? Sound Mind Investing can help. Learn how to become an SMI print subscriber and/or web member by clicking the sign-up button below.
Unless you just happen to like high levels of stress, it simply doesn't pay to follow the daily movements of your portfolio. Sure, it may seem like daily performance information is helpful, or at least not harmful. But most of us simply aren't wired to process significant swings in our investments without a commensurate swing in our emotions.
Emotional upheaval causes us to want to "do something" in response — something like "get out of the market until things settle down." Unfortunately, that kind of short-term emotional response almost always undermines the long-term appreciation of one's portfolio....
[T]he only time you really need to look at your holdings is when it's time to take a predetermined action that's based on your long-term plan, such as replacing one fund with another (as Upgraders do) or rebalancing your portfolio....
So if watching your portfolio go up and down has you all stressed out, the simple solution is to just look the other way — until your plan tells you it's time to look. When that time comes, check your holdings, take whatever action is needed (based on your plan), then get on with your life.
Chuck Jaffe at MarketWatch is offering similar advice in the wake of recent marketvolatility, including the early May "flash crash."
Combine too much information with too little confidence and you have a recipe for knee-jerk reactions....
"Our emotions are going to be affected by where our attention is," [said John Nofsinger, a Washington State University professor who studies investor behavior]. "And if our attention is on the minute things — the moment-by-moment or day-by-day — we will have a lot of swings. If our attention is on the big picture, we can breathe normally while the wild swings are going on."...
Experts in behavioral finance note that many investors move to [a day-by-day investing focus] as they age, as their financial recovery time shrinks and as they look out at the future and fear that maybe they will be the person whose retirement is put on hold because of one bad day....
Investors need to use events like [the May 6] meltdown to find the right "psychological distance" from the market — the range of emotions they can live with.
"You don't want to think the sky is falling all the time, but you don't want to ignore things and assume nothing can happen," [said Donald MacGregor of MacGregor-Bates Inc., a Eugene, Ore., firm that researches judgment and decision-making]. "You need to develop the emotional discipline to have a plan and stick with it, but also to recognize that market moves that didn't bother you when you were 25 might bother you a lot when you are 50 or 60."
This is why SMI's approach to investing involves carefully taking into account one's investing temperament and season of life when developing an investing plan. Doing so will help you adopt a plan you can stick with when the short-term news is unsettling.
To borrow a phrase from Ben Franklin (he used it in speaking of marriage): "Keep your eyes wide open before [investing], half-shut afterwards."
Visit our investing strategies page to learn more about investing the SMI way. For details on how to become an SMI print subscriber and/or web member, click the sign-up button below.
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Here's another short commentary from SMI founder and publisher 
Concerned about how the Japanese earthquake, rising oil prices, or Middle East turmoil may affect your investments? You're certainly not alone!
Whew! How should investors respond?
There are two primary ways to invest successfully in the stock market over time. One is to be an extremely nimble trader — which is exceptionally difficult. The other is to be a long-term investor. That's not easy either, but for a different reason.
