Back in elementary school, my teachers discussed the importance of practicing monthly fire drills at home. They told us how to exit our home in the event of a fire. They also told us to check with our parents about a designated meeting place for family members to meet outside the house.
Every spring, our teachers reminded us to ask our parents where we should take shelter in the event of a tornado. Teachers were some of the most important people in my life. Their instructions were not meant to inspire fear, but to help students respond logically to unexpected and frightening situations.
In that same spirit, this article is not intended to instill fear about the markets or the economy. My goal is to help you respond logically to events that are out of your control. As my teachers used to say, “The event is not yours to control, but the response to the event is.”
I tell my children that I never get upset over bad results, but I do get upset over bad decisions. Too often, we compliment ourselves for making the “right” call, only because a situation turned out in our favor. When we respond to a stressful situation with emotion rather than logic, we often experience negative results. Yet these hard lessons are often forgotten when we make investment calculations.
There are many conversations today about market valuations. Many of these conversations echo my teachers’ warnings about “conditions ripe for a tornado.” Growing up in Delaware county we heard about such conditions many times. Sometimes a tornado really did touch down.
Warnings about conditions ripe for a major market correction (20% or more) are overblown in my opinion. We can’t afford to rely on cliche’s from the past when looking through today’s lens. Never have we seen global interest rates this low for this long. Never have we seen all of the major economies across the planet in growth mode. Potential tax reform, the mass retirement of baby boomers and historically low volatility all put us in uncharted territory. Bob Gregory – the legendary Indy weatherman I watched as a kid -would be scratching his head rather than offering a prediction. Today is no different.
None of us can predict the winds of change. But we should always consider how we would respond to a negative event. What changes – if any – would you make to your portfolio? During our team’s “market fire drills” we consider how a shift in market direction would prompt us to eliminate some investments, buy other stocks on the cheap, and make specific adjustments. If you are managing your own funds, consider how tax code changes that may pass this year could affect your portfolio. What would you do if the market fell by 10%?
No one knows if or when a storm will arise. Conditions are always changing. Making logic-based decisions when conditions are calm can help you avoid an emotional reaction and respond rationally should a storm arise.
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.