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Preparing - Not Predicting - for the Next Market Correction

“The markets are frothy”
“Day trading is going to replace my full time job.”
“Valuations are a joke.”
“If you’re not making money in this market, you’re an idiot.” 
“Have you seen what the Fed is doing?”
“Investing is easy! Just watch my TikTok video.” 


There is no shortage of opinions that the US stock market is overvalued and ready for a crippling fall. 

Conversely, there’s no shortage of opinions of just how much more the market has to run. 

So which is it? 

I don’t know. 

(Which probably isn’t a satisfying answer to hear from a financial advisor.) 

I couldn’t tell you with much conviction - and even less certainly - where we are currently at in the market cycle. 

By cycle I mean the sometimes fast, sometimes slow movements from an all time high, to a painful low, then back up to a new eventual high, to yet another painful low, and then back up again. 

But regardless of where we are at - we should be prepared. 

And by prepared I don’t mean predict. I don’t think predictions hold a whole lot of weight. Preparation, however, is different. 

We can be prepared in two ways: emotionally and financially. 

Emotionally prepared means that when the eventual market decline does happen (albeit today, next week, month, year, or decade) we shouldn’t be shocked and panic-sell our investments. We should expect that things don’t always go up. They go sideways and down at times. 

Financially prepared means that when the eventual market decline does happen, we aren’t scrambling for money to pay the bills using our investments. We have the cash or relatively more conservatives investments available to weather the storm, and we can let our more stock-oriented investments ride out the storm and into new, higher waters. 

A few visuals to help show the market may be in order. 

Ben Carlson broke down the positive vs negative returns of the market - broadly measured by the S&P 500 - succinctly over varying time periods: 
I think this is helpful because it shows how in the short term, the market is less predictable. But in the long term, it becomes a bit more predictable. 

He then showed the total returns over varying time frames. 
Awesome!

But there’s no such thing as a free lunch, as the next chart here that I created shows the various drawdowns - or the declines off of all time highs - since 1926.
Scary looking - but helpful from a perspective building standpoint. 

John Templeton’s had a famous line: “Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria.” It’s clever, but it doesn’t really help a long-term investor know precisely what is going to happen. 

And just providing a listening ear - I have no idea what the public sentiment is right now. Are we pessimistic? Definitely some chatter there. Skeptic? Yep, I’ve heard those voices. Optimistic? For sure. Euphoric? Umm.. TikTok creators are masquerading as financial advisors. 

My point is that as humans - we crave certainty. And we’re a sucker for predictions. But when it comes to investing, there’s just no good way of timing these things. 

And so rather than try and predict them, we should just be prepared. 

I’ll leave you with one last image - the return of the S&P 500 with all time highs marked in red (via Dollars and Data). I find this fascinating because (1) all time highs are nothing new, and thus not a valid reason to hold off on investing, and (2) while declines are inevitable at some point, the long term pattern looks promising. 

Interesting Resources

Quote
Tim Mauer, on the benefits of having a boring investment strategy
"But that’s OK, because your portfolio isn’t supposed to be one of the most interesting things in your life. Your portfolio is better served to simply support the most interesting things in life."

How To Spot Fake News
A few minutes | Visual Capitalist 
Fake News is no longer limited to one side of the political party (not that it ever truly was). It's everywhere. And one of my largest personal pet peeves is when a friend sends me an article or screenshot or soundbite without doing any fact checking. This could be simply filed under "Things we shouldn't have to know a skill for." But in a world where truth seems ever more slippery, it's definitely helpful. Tips include checking the URL, how to confirm an author, and documenting supporting sources. 

Will The Real Value Factor Funds Please Stand Up?
3 min read | Alpha Architect
Speaking of fake news... ok, that's a little harsh. But super intriguing article here (that is a summary of a much headier academic read) that demonstrates how just because a mutual fund uses the term "value" in their name, doesn't actually mean they have much "value" under the hood. 

Simple Writer
Your call | xkcd
One thing I at least make an attempt to do (not always successfully) is to avoid using jargon when I explain things. I also fancy myself a writer of sorts, so I pay a fair amount of attention to words. This challenge was ... well, pretty challenging. You can write out whatever you want - explanation of what you do, laws of physics, how compounding works, personal or work mission statements - and it'll red flag you if you use "non-simple" words. It's a great challenge to try and get precise and simple with explaining what we do. Here's a snapshot of my unofficial missions in different areas of my life. I spent entirely too much time eliminating any non-simple language. 
Thanks again for reading. See you next week. 

Gratefully,
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