Different Year, Same Movie.
I’ve seen this before. In fact, all of us have. It’s the same bloody movie every time. But you always think it’s going to be different this time. It isn’t. It never is. In every James Bond movie, there’s always a moment where it seems like he won’t escape this time, won’t get the girl this time. But he always does. Because the pattern is the same. And it’s exactly the same with the stock market.
Everyone is making so much money!
In 2007, I was an investment advisor. The market had been on a multi-year tear and no one wanted to hear anything about risk management. Every cab driver, barber, and bartender I met had a stock tip. A sure thing, a stock that only went up. It was mania. They wanted all the stocks, all the time. It’s what investment professionals call “risk-on exposure” to the market. It’s like a great dream that was never supposed to end.
And everyone had a story. A story about their friend/cousin/colleague/kid who was making boatloads of money in the market. Anyone could make money in the market, I’d often be told—what did they need an advisor for? This was all just so easy. Trading stocks began to take up time from people’s regular jobs; they’d make more money trading, so why not focus on that, they’d say. It was truly an investment paradise.
We all know what came next.
And then 2008 came. The markets fell 30% to 60% and wiped people out. Fear, tears, ruined plans. I remember one client telling me he was going to put all his money in cash and never consider buying another stock again. (Sidebar: That client in 2015 asked me why we didn’t have all his money in stocks since they were going up so much!) But in 2008 and early 2009, after the crash that “no one” saw coming, there were no more stories. No more day trading, no more stock tips from cabbies.
The thing is, it happened in 2001 also. And in 1987. And in 1981. And in 1973. And in ‘74. It happens all the time. And it’s going to happen again. Soon.
It feels the same.
It’s going to happen again and it feels just like it did then. The dot-com mania. The 2007 mania. People are forgetting the lessons of history and taking too much risk. Assuming things will only continue going up. They won’t. And if you don’t reduce your risk exposure and take proper precautions in your portfolio then it will hurt you too. Probably again. Because the curse of the human condition is its unwillingness to learn from those that came before.
The market doesn’t always fall without giving notice. There’s often a canary in the coalmine, a shot across the bow, warning of impending danger. You had two of them in late 2007 and early 2008 before the colossal 2008 crash. You’ve just had a big one in March, and another last week. Heed those warnings.
What should you do?
I’m not suggesting that people should sell everything. I’m suggesting that investors should be prudent and bear in mind what will happen to their assets if the market falls precipitously. If your portfolio has gotten out of whack, and has far too much exposure to stocks, or to a particular stock, consider reducing that exposure and diversifying your portfolio. Instead, think about investments that perform well in market declines. Think about having some “dry powder”--cash on hand--to buy things when they’re down. Consider investments that don’t correlate to each other. And for God’s sake, don’t keep making the same mistake again. What goes up can also go down. Pull up a chart of Nortel if you need a reminder!
For the millennials.
Perhaps you’re too young, and you weren’t investing - or even alive - during most of those previous crashes. To you, this is all new and exciting. Do yourself a favour and study some market history. Markets are cyclical, and patterns repeat. To paraphrase George Santayana, if you don’t bother to learn from what’s happened, it’s going to happen to you too.
Be different this time.
No one knows what’s going to happen and when—that’s for sure. But periods of irrational financial exuberance are typically followed by periods of painful financial losses. This one will be too. I don’t purport to know if it will be in a month or a year, but it will come, and those who have prepared wisely in advance will be far better off than those who believed that this time was different.
Has your financial advisor prepared you for the coming storm? Make this time truly different by avoiding the same mistakes that have plagued investors for generations.
--J
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