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Danger ahead or does the party continue? Despite political unrest, chaos in the streets, high unemployment, looming inflation, and concerns about a return to normalcy, the market has been kind to us. That does assume that we have been invested the entire time and not made a knee-jerk reaction to the unprecedented events that unraveled in the past year. Does that mean that all of us have done just that? No - of course not! Recently, we have been meeting with potential clients who have allowed their nerves to get the better of them. After losing around 30% in March/April, they sold investments and remained anxiously waiting in a cash position. Looking back now does nothing good for those in the camp that the sky was falling. With that said, how does that create a learning narrative and impact decisions moving forward? A logical question you may be thinking about even if you were invested the entire time.
Danger ahead? Well, maybe - but what does that actually mean, and how does it impact your overall investment philosophy? The reality is, nobody truly knows when the market will "correct" or go into bear market territory. We are NOT "Perma-Bulls" by any means, but that doesn't mean that we would ever recommend going 100% to cash. In our 25+ years of combined experience, we have yet to see that strategy pan out. The market is fickle. It has no feelings, doesn't know how to tell time, and doesn't care about year-to-date performance. It can be your best friend and your worst enemy; many times over a short period of time. At some point valuations will matter. That's right, earnings, cash flow, balance sheet, and future sales potential will come into focus.
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Attempts to be a hero and avoid market crashes can be a costly novice mistake. Possibly the worst investment at this current point in time is cash. So, does this mean that you should do nothing, remain invested the entire time, and become an innocent bystander as your account gets slaughtered? In short, no! Not at all. Keep in mind the stock market has two ends of any trade. There is always someone making money whether the market is going up or down. Finding areas of the market that appear to be undervalued or provide potential upside is our job. It's literally what we are paid to do each and every day.
Is there anything you can do to protect your income or principal? Of course, there is, but that comes with a number of follow-up questions and trade-offs with respect to capping your overall return or tying up your capital for a given period of time. We have ways to hedge against loss, speculate in certain sectors, or even provide defined downside protection. Yes, it's true - there are things you can do to help protect against loss. That in itself is a lengthy discussion and can be done in many ways that are specific to each individual. The point is that you can and should be taking action if it's imperative to meet your needs, goals, and comfort. In many cases, active management and diversification will tackle those challenges and mitigate your willingness to make a foolish decision.
Berkshire Hathaway Chairman and CEO Warren Buffett GETTY IMAGES
What are the "experts" saying about the market right now? We cannot ignore the insights from the Oracle of Omaha, Warren Buffet, and his often candid commentary on the market. In the latest article citing Mr. Buffet, (FOUND HERE) his market indicator reveals that prices are expensive and a correction may be around the corner. Like most of us, logic, rationality, and common sense don't always line up with market returns. The market knows no time. As the Oracle has mentioned in other articles, "...They are dancing in a room in which the clocks have no hands" (FOUND HERE).
The quote is from 2000 and has relevance over 21 years later. The question shouldn't be "if" the market is going to crash, but "when"? It will happen and you will see your account value drop. Market cycles are a natural thing that reigns in pricing that has run up a little too far ahead of itself. If you've been investing in the past two decades you would have experienced full market cycles that bring down account values and create opportunities. Stocks become a moving target that requires discipline, strategy, and nerves of steel. We watch the markets tick by tick, hour by hour and it's something we don't recommend for the average investor. The number of emotions that can run through your head during the course of a day can be astounding.
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Investing is a journey. This is NOT a sprint and shouldn't be treated as such. It's something we hope to be a part of and provide you guidance, knowledge, support, and disciplined strategies as we navigate through inefficiencies of the market. We remain diligent and active in our approach to money management and believe this will aid you in the pursuit of your goals. Although we are not market timers, don't employ leverage, or take on high-risk "bets", we do what we can to protect on the downside and seize opportunities when they present themselves. If you are new to our firm or investing, the one thing we can guarantee is that the market will go up and down. It's not a one-way street and that has to be embraced. Long-time clients of ours know and understand this. We communicate our strategies and rationale in the most difficult of times; the times when most money managers do not want to meet or discuss things.
If you have money to put to work, a looming market correction should not impair your goals. It might mean the type of investments selected are different when things of yesteryear are no longer relevant and change is around the corner. We have a number of headwinds that will work to combat market appreciation and there will always be hints of a catalyst to move the market higher. Remain focused on your goals and we will help work towards achieving those outcomes. Consider our firm as a true partner in your overall journey we call life.
Want to learn more? Follow our latest market commentary, firm updates, or anything financial via our blog or Podcast.
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