Those February Markets

In December and January, we talked quite a bit about the perils of uncertainty and how to deal with them.

Then – BAM – the February market came and showed us just what uncertainty looks like. So basically, our publishing schedule is a month or two ahead¹.

What Do We Know?

Well, not much really. There are lots of people out there who have some ideas about why stock market volatility increased. Rising interest rates. Overpriced stocks. Maybe it’s all those cryptocurrencies. Maybe a whole bunch of people pulled their money out because they were sick of all this winter and took a beach holiday.

The truth is that it’s all conjecture at this point. Hindsight is 20/20 and some smart people will be able to look at the volatility we’ve experienced a few months or years from now and tell us what it all meant, and why.

It’s possible they’ll say it meant not much at all. The 24 months previous to February 2nd was a time of peaceful money-making, a market that ignored world politics and kept its nose to the grindstone, despite weird things like Brexit and Donald Trump. It was actually pretty unusual.

It’s possible they’ll say it was a leading indicator of whatever comes in the next months. Our tinfoil hats aren’t tuned in to the right channel quite yet, so we can’t quite say what that looks like.

What we do know is history. History tells us that, unlike the past 24 months, we can reasonably expect market volatility a few times each and every year. It tells us that we have to remind ourselves that volatility does not equal loss, despite what those statements say.

It tells us that looking at our accounts daily, or even monthly, might just be pointless activity (provided our investments are well-managed). Imagine if your house was repriced daily. That would make you hyper aware of real estate markets. As it stands, you get your property assessment once a year, and it’s already 6 months out of date. You don’t really care what it’s worth until you’re ready to sell it, or have to pay your property taxes (in which case, you’d really like the value to be lower).

You know what else you do when your property assessment or your real estate appraisal shows a drop in value? You don’t sell it. You wait for the market to come back.

Your equity and bond based accounts really aren’t that different. At the end of the day, they’re all pieces of your total net worth, your present, and your future. We can’t control what the millions of investors in the world are doing, and we sure can’t predict their future actions.

Here’s what we can control:

1. Cash flow. It sucks to have to take money out of a portfolio that’s falling. A cash wedge, a pension, or another non-market stream of income that can keep us in good daily financial shape can make all the difference. If we can ride out 1.5 to 2 years on something other than stock market returns, we can generally outlast a bear² market, if it happens. But, first you need to know what your cash flow needs are.

2. Your plan. What resources do you have? How long will you need them? At what point do you need to start accessing which resources? Understanding those pieces and how they flow together ensures that you know what to do and when. Those bear markets? They can go on being bear markets. You’ll be ready for them when they come back as bulls.

There’s a reason why the work we do tends to be tied to your investment portfolio. Understanding where you’re going and what you need to get there helps you make great decisions into the future, even when those parts of your world that you can’t control or predict (and no one can, we don’t care what they say³) are acting exactly how you wish they wouldn’t.

¹Did we know??? Are we psychic? No. We are most definitely not psychic. We don’t know how to time the markets better than anyone else – because really, no one knows how to time the markets. Honestly, this sort of thing just makes it harder to come up with new writing ideas. We wish we published “Managing Uncertainty” this month and wrote a piece on estate planning in January instead. Much more timely.

²How do you define a “bear market”? It’s a market where securities (stock) prices fall and most people are feeling pessimistic, which causes the fall to continue further. Pessimism and selling increase. A bear market might be a downturn of 20% (many people have different numbers for this percentage point but let’s use this one for now) from a peak in multiple indexes (like the TSX or Dow Jones) over a two month period. A “correction” is a downturn of 10% or higher that lasts less than two months. Most bear markets are associated with recessions, commodity spikes, interest rate increases, and/or extreme valuations.

³If anyone tells you they can, you have reason to be concerned.