About a year ago, I wrote a blog post wishing that all long-term investors get at least one bear market in their investing journeys. In that post, I made the case that a bear market is a blessing in disguise, rather than a curse, for all patient investors.
Here we are one year later, having gone through yet another bear market. For the record, this is my third bear market as an investor. The previous two were the 2000 Dot-com Bubble and the 2008 Great Recession. Admittedly, this year’s Coronavirus Crash was the least painful and the shortest of the three bear markets.
In that October 2019 post (Bear Market: a curse or a blessing?), I wondered why the popular media considers a bear market to be the end of the world. Something that must at all costs be avoided.
I wonder how many investors were able to get out of stocks before the market plunge in March. And a month later, how many were able to correctly call the market bottom in April. Not many, I suspect. Certainly, the financial media wasn’t helpful in predicting either the top or the bottom. It never has.
When the coronavirus pandemic emerged, it was an Unknown unknown event. Something we were neither aware of nor understood it. One may call it a black swan event. It wasn’t possible for anyone at the time to predict it, much less understand its impact on the stock market.
Then as time went by, this risk went from being an Unknown unknown to a Known unknown. In other words, it became something that we were clearly aware of but still didn’t fully comprehend its impact.
How can I protect my portfolio from such black swan events? Short answer, I can’t. By definition, these are unforeseen and unpredictable events. However, I don’t invest in stocks what I might need in next five years. I also keep a healthy amount of dry powder cash to take advantage of such market crashes. See this: Why I stay invested in stocks?
Another good way to protect a portfolio from ill-effects of market crashes is investing regularly with new money even when share prices are down. Investing in installments, a.k.a. dollar cost averaging, works well too.
In January this year I did a blog post on Barron’s annual roundtable of expert investors. See this: Another weekend of worry. Every year, there are things that have these professional investors concerned. Turned out that in January, Barron’s invited guests were worried about the trade war with China, high valuations, immigration, and lack of catalysts. Pandemic was of course nowhere in the picture.
So a lesson learned for all Barron’s readers (myself included) is take expert predictions with a big grain of salt. Or better yet, ignore them altogether. This goes for all media predictions, not just Barron’s annual conference. Peter Lynch had warned us of the pitfalls of media prognostications decades ago.
When we began the year, investment picture looked quite rosy. U.S. economy was doing well. So were the stocks. Then in a short span of time we went from sunny skies to turbulent weather.
Today as we approach the end of the year, economic outlook has brightened significantly. The stock market is also reflecting this majority view. But we long-term investors must stay even keel. Sunny skies don’t last forever. Neither do thunderstorms. We just need to stay invested throughout. It reminds me of Charles Ellis’ words from his book Winning the loser’s game:
If stocks return an average of 10 percent per year how often over the past 75 years did stocks actually return 10 percent? Just once (in 1968). And how often did returns even come close to that specific number? Only three times. That’s why investors need to “average” delightful and dreadful markets over many years.
We’ll have our fair share of delight and dread if we stay in the market long enough. See this post for how one-year market returns vary wildly.
So, what might be next for the stock market? I have no clue. The pandemic is no longer an unknown unknown factor but there is still quite a bit of uncertainty around it. It is unclear when we would go back to our pre-pandemic lifestyle. The market has mostly recovered from the initial pandemic induced shock, but history tells us there will be other worries taking its place in future. As of today, the market is off about 10% from its September peak. What’s worrying the market now? Pandemic after-effects, lack of government stimulus, and presidential elections. This is how the market works. It lurches from one crisis to another, one worry to another, and yet amid all the constant worries, it manages to move up with the economy. There is no reason for us to believe that this behavior will change post pandemic. Keep that in mind when you read next year’s Barron’s roundtable pontifications.