Best of Web: Investing in Stocks, Volatility, Stock Market Corrections and Crashes

Here is another post with six Best of Web links I have found worthy to share with you all dealing with investing, speculating, stock market volatility, investor behavior, long term investing vs short term trading and just general advice to  help you weather the inherent volatility in investing in stocks, something we had not seen for a long time as we have all been on a rocketship it appears.

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The Best of Web posts are much shorter in length with material that is a notch or two above what you see in the regular TBB posts.

Click on the headline for the link!

I wanted to post these last week when the stock market took a nosedive with extreme volatility in some trading sessions, 1,000 point moves intra day in several back to back days. But I was in Kauai and time was limited so now that I am back with a major snowstorm raging outside in Ann Arbor, Michigan I am posting this today because these are great articles that you should read and save to help you for the next downturn. Because there will be more as it is the nature of the beast, the price of admission for better long term returns. Remember, it is how you behave that is the major determinant of how successful you will do in investing. When red turns into a flood, it can mess with your head. Same thing happens when we reach new highs every other day. Remember, anything is possible in the short term. Be careful out there!

 

Are you Investing or Merely Speculating

I would say turn off everything and just focus on more important things!

The article starts with this great quote:

“Whether you’re excited or nervous when your favorite asset falls in price marks whether you’re investing or merely speculating.” – Naval Ravikant (Founder of AngelList)

I miss these good old days when I was getting more excited more often lol.

If you have a long enough time horizon and a diversified portfolio, buying at lower prices will increase your long-term return potential. Which is why a stock market crash is actually the best thing that could happen to young investors.

Holding stocks for a day or a week is not much better than a coin flip (only positive 53/57% of the time). If that’s your time frame, you don’t have the luxury of waiting for stocks to come back and any decline should make you nervous.

In contrast, holding stocks for 20-30 years has never yielded a negative return, even for investors who bought at the peak in 1929 and held throughout the Great Depression. Given those odds, long-term investors should be excited when stocks go on sale – and the earlier the sale, the better.

Reframing Volatility

Stocks appear less volatile the less you look at them.

If you can help it, stay away from checking your portfolio when you’re losing money. Stocks won’t stop going down just because you’re looking at them, and the more you see your money evaporate, the more likely you are to do something to make it stop. But an investor’s job is not to avoid the pain but to endure it.

It’s no fun when stocks are going down. But if you understand, not just intellectually, but in every fiber of your portfolio, that this is part of the deal, then you’ll be well-positioned for when they start to go back up. I don’t know if that’s tomorrow or next year, but I know that in the meantime you have two choices: try and avoid it, or accept the fee. Choose wisely.

 

Coping with two conflicting realities

Among other things, investors have to cope with two seemingly conflicting realities: In the long-run, things almost always work out for the better; but in the short-run, anything and everything can go very badly.

However, it can’t be reiterated enough that 5% pullbacks and 10% corrections happen more often than not in any given year. Bear markets, where stocks fall by more than 20% from their highs, are less frequent, but they are something that long-term investors are likely to confront during their investment time horizons. Unfortunately, it is incredibly difficult to predict when stocks will fall. And exiting stocks in an attempt to avoid short-term losses can prove incredibly costly to long-term returns.

What was the story behind the 10% drawdowns in 2018, the 14% drawdown in 2016, the 12% drawdown in 2015, the 10% drawdown in 2012, the 19% drawdown in 2011, and the 16% drawdown in 2010? [I bet you don’t even remember them!]

If you’re not able to stomach short-term volatility or if your portfolio can’t handle short-term unrealized losses, then investing in the stock market might not be for you.  These short-term challenges are the price investors pay for long-term riches.

 

This is Normal

Here are the annual calendar year returns for the U.S. stock market along with the intra-year peak-to-trough drawdowns:

This is a look at the annual returns and average intra-year drawdowns by decade:

And 2 out of every 5 years has experienced a double-digit correction but still finished the year with double-digit gains:

 

What to do When the Market Feels Crashy

1. Revisit your financial plan and goals.

2. Revisit your max pain point. 

3. Remember that perfect is the enemy of the good.

4. Talk about it.  

 

The Price of Admission in Stocks

From the March 2009 low through the high earlier this year, the S&P 500 gained 818%. That’s an annualized return of nearly 19%.

There have been 27 corrections since the March 2009 low of more than 5%. Of these, 9 were larger than 10%, 3 exceeded 20%, and 1 was more than 30%.

In simplest terms: risk is the price you pay for the possibility of higher long-term reward.

…there’s no free lunch. The premium you earn from owning equities over bonds/cash is primarily due to the higher volatility and drawdowns you must stomach over time.

Another way of looking at this is to view the historical odds of varying intra-year drawdowns. We have seen a decline of at least 10% every other year, and a 20% decline every 4 years on average.

“You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.” – Peter Lynch