Fear and Volatility, Portfolio Killers inching closer and closer

Fear is normal for anyone who depends on their investments to live. Volatility sounds like a fancy word advisors use to put lipstick on investment losses, but that's not always the case. Firstly, if you are feeling anxious or fearful about the stock market, investments, and your money, you are not alone. Growing apprehension about potential market volatility and rich, frothy valuations is commonplace and quite simply expected. There are numerous reports and concerns surrounding the implementation of A.I., higher unemployment, and sky-high valuations on these types of companies without any proof that they'll generate the revenue or earnings their share prices might suggest. The potential for a market correction is valid; after all, we've all experienced some handsome returns over the past decade or more. Your nervousness is understandable, as many articles and market pundits raise valid points rooted in historical parallels like the "Spirit of '29." The A.I. “thing” adds another layer of complexity because I don’t know that everyone really understands it and how it will be used. I am not a fan of what it can be used for by thieves and criminals, and I’m not so sure that regulators comprehend the gravity of that. Anyhow, that’s a topic for a different time, so let me tuck my crime-fighting costume away for now.

I read through several articles surfacing around these topics, and it's only natural for it to capture attention, especially when they predict a significant market event. We see this pattern time and again: when markets are hitting new highs, and speculation seems rampant, the loudest calls often come from those predicting a crash or shouting that the top is in. That is a risky call in my book and a hard one to pinpoint. My focus and the focus of the firm remain on long-term goals and planning. I also think each person’s scenario is different. A lot has to do with time, comfort, and goals. If someone had $500k set aside to buy a home in the next 10 – 12 months, I would NOT advise them to invest in the market. It’s too hard to get right, and even if they make 8 – 10%, it doesn’t really move the needle in such a short period of time. I’d be more concerned about loss. In that case, the upside-downside risk is not worth it at all.

Fear and Volatility - The "What If ?" Question

Whenever someone comes to me with a doom and gloom article and asks me what if it happens, I ask – what if it doesn’t? Fear and Volatility are real. I’m not saying all financial articles backed by historical evidence are doom and gloom; many contain valid data and pinpoint pockets of insane valuations. Content produced by Jeffrey Gundlach (who is somewhat local to us and I often disagree with, but has substantial market knowledge and merit) and Roger Babson clearly lays out the rationale for why a market crash or correction may be imminent. They point to frothy markets, speculative A.I. valuations, a focus on a few megacap stocks (the "Magnificent Seven"), and parallels to the private credit market and the subprime crisis of 2006. I have also given recent talks to corporate clients about the recent divergence and diminished reliance on only a handful of companies as it relates to the overall market. The days of only five or so stocks controlling the market are dwindling.

Remember, a core part of our long-term investment planning for clients hinges on a single question that the writers rarely address: What if they're wrong?

·       Many analysts and market commentators carry on with their day regardless of the outcome. Yes - it's true, and you can see it time and time again. Headlines read, "Beware of the bear market and sell now!" When it never comes to fruition, they simply write more and more articles and change their narrative to fit the market landscape. Eventually, they will be right. Almost like a meteorologist who gets it right now and again. Yet, they carry on. Clients' net worth, their investments, and their nest egg are much more meaningful than the weather.

·       What about consequences? For an investor who takes action on any call resulting from headline news —moving out of the market and into cash—the impact of being wrong can be significant. It can take several years and sometimes a decade to recover from mistakes. For some, it's time they just don't have.

We saw this firsthand in the lead-up to and aftermath of the 2008 financial crisis. While some clients felt the early downturn of the crash and wanted to sell before realizing more pain ahead (many were down 35% at that point), the subsequent challenge was when to get back in. The clients who sat in cash-like positions for years waiting for a definitive "all clear" sign ultimately missed the recovery and the significant gains that followed. The market often acts irrationally, where good data becomes bad and vice versa.

Market Resilience in times of volatility mixed with Political Uncertainty

I can remember a similar moment of high angst and emotional turmoil back when President Trump was campaigning before his first election. My own rationale, like many experts at the time, was that the unknown and radical policy changes would cause the market to crash and crash hard. Considering Mr. Trump as our President seemed far-fetched. He was someone who wasn't your typical politician or polished presidential candidate. His approach to policy, debates, and reform didn't fit the mold or my style. He was a man who was part of many of my everyday discussions, as I did consultant work for a Casino in my previous life. I had talks between union leaders, Casino Moguls, and local entrepreneurs who had mixed feelings on their business dealings with him. It was hard to imagine the man I would see flying in on his helicopter from New York into Jersey and landing near his Trump Marina property could one day be our President.  

·       As history unwraveled, he won, and the market initially reacted as expected, dropping severely in the after-hours and early following day. Alas, could I have gotten at least one prediction right about the market decline? I went to bed late in the evening, thinking I had it right.

·       But the market quickly changed course and began a massive, multi-year bull run—a trajectory that defied my prediction and the consensus market fear. How could this be possible with all the mixed feelings about him running our country? His demeanor, approach and radical policy change couldn't possibly support a growing economy? I wasn't alone in believing how the market would react, either.

This highlights an essential truth: the market is a complex, often irrational mechanism. It rarely waits for a politician's policy to be implemented, an economist's forecast to materialize, or for all the perceived guardrails to be in place (or for the regulators to "tune in," as articles might suggest). It finds a way to move based on global capital flows, earnings, innovation, and ultimately, the collective human nature that the author Andrew Ross Sorkin says makes us "lose its head" in a "collective fever." By the way, I love seeing Andrew and Joe Kernan debate on Squawk sometimes. It makes for great TV!

Our Focus: Planning for You

My commitment is to my clients and NOT to corporate shareholders. I don't manage assets based on policy alone, political turmoil, interest rates, or market emotions. Neither do any of the advisors in the firm. We make a voluntary and transparent commitment to our clients when we sign paperwork. That agreement is not to be taken lightly.

You may be reading headlines or seeing articles that suggest two extremes: either a huge buying opportunity or the contrary, sell now and save money while you still can. Market commentators are paid to look for clues, use them to formalize an opinion, and develop a compelling rationale to follow that position. I’m not dismissing any opinions that point to looming market concerns because the reality is, the market is not cheap. We are at all-time highs, and Price to Earnings Multiples are stretched far and wide. Like an aging rubber band, how much further can it go? But we must remember, markets don't know age. They don't comprehend the concept of time or how long a bull run has been going.

At the end of the day, nobody knows for sure how things will shake out, especially in what I would call short-term (12 – 24months). But we can be sure of a few things:

1.       The market will correct at some point. When, how long, and how deep is anyone's guess. At some point in time, there will be a market that will rely on earnings and a multiple that the general public will determine to be right. The catalyst for most of the severe market crashes is usually something that blind sides you on a random day. It's not usually the things everyone worries about for months on end.

2.       Death and taxes are guaranteed. None of us makes it out alive, and none can completely escape taxes. Yes, there are ways to extend our lives and ways to minimize taxes, but at the end of the day, there will come a time for us all to pay the piper.

Closing Thoughts

Now that I’ve either bored you or put you to sleep after that dissertation (lol), that's not the end-all be-all for our clients or even those who don't currently work with the firm. We are accepting new clients and are happy to meet and discuss your personal financial plan. It doesn’t necessarily have to be a formal meeting either – it could be a quick call or a virtual call if you’d like to see some of our ideas for your specific situation.

Instead of trying to time the market for a correction or an opportunity—a feat I have repeatedly seen done poorly, even by so-called market experts—it is imperative that we remain focused on your long-term financial goals. Our strategy is built for long-term growth. Along that journey, we will inevitably face corrections and drawdowns while capturing the compounding power of the market's long-term upward trajectory. Some profit-taking and trimming in some of the more tech-focused stocks makes a ton of sense. The beauty of our portfolio construction and management is that we can tailor thematic investing where it's appropriate for things like a tilt to the ESG (Environmental, Social, Governance) type of companies that have a focus on being socially responsible.

I truly hope every one of my readers and followers is getting solid financial advice because you deserve it. I realize there are a plethora of sound investment advisors and firms out there, and I respect those who are working with someone who is doing right by them. Wishing you all a fun and joyful Thanksgiving with those who mean the most to us: Family! Season's greetings and happy Turkey Day, all.

Oh, and one last thing - don't forget that you'll need your health to enjoy all your hard-earned growth on your investments. Make a conscious investment in yourself and watch some tips from my latest Podcast Episode. Dr. Sam is full of personality, and we chat about some of the most vital things you can do to ensure a healthier you!

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