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When Markets Turn

January 21, 2020

When markets turn, it can come as a complete surprise to even the most experienced advisor. We often don’t know when the market has officially turned while we are in the midst of it. It’s easy to look back in history and year-to-year, or even month-to-month and recognize the beginning or end of either a bull or bear market. In our day-to-day we just can’t see it turn that quickly.

As I write this article in late December of 2019, we have all benefited from a large and long run up in the stock markets. I like to use the plural because if you are my client you know I look at more than a dozen stock markets globally rather than the singular Dow or S&P 500, which most of your friends or media refer to as the “stock market”. Yes, the markets are on fire and like all fires, this one will naturally run its course. When? I don’t know. But here is what I can tell you: When the market turns, the best course of action is to not fight it. Get to an elevated position where perspective can offer you a better view and you will see this time is NOT different. And while others thrash about trying to DO something, usually the best course of action is no action at all.

Markets, Rip TIdes, and Lifeguards

Rip currents (a.k.a rip tides) can kill people in the water. Swimmers caught in a rip current who may not have the necessary water skills will panic or exhaust themselves trying to swim directly against the flow of water. To add to the danger, rip tides are all but impossible to see while in the water. So, here is a natural phenomenon that appears out of nowhere and if you fight it you drown. Sound familiar? It’s like fighting a turning stock market. For one, you’ll never predict its onset. Secondly, once you realize it’s in effect and try to fight it by pulling money out or demanding your broker or advisor DO something, you are making matters worse, not better.

The way to survive a rip tide is to not swim directly against it, you must swim lateral until you get out. Simple. Most of us know this information. But if you get caught in a rip current most people panic even though they know what to do (and not to do). This is when lifeguards come into play. Lifeguards know that when they are needed is usually when the drowning victim is least likely to comply with directions. The lifeguard swims out to the victim and tries to calm them down. The victim can’t thrash wildly because if they injure the lifeguard now BOTH are going down and the victim doesn’t stand a chance. So, the lifeguard is forced to coach the victim to ignore all their hard-wired, natural instincts and instead turn control over to the expert who will guide them out easily. If the victim can do this, if they can be coached to ignore their instincts, they stand a good chance of surviving. If he can’t then his odds of survival are small.

This is the exact same situation when market volatility turns red. When this happens, you are likely to be in an even WORSE situation than our swimmer in the rip tide. Why? Because at least the swimmer wouldn’t have hundreds of onlookers screaming they should panic because this riptide is the worst one EVER! Who would do that? Well…the media. And your brother-in-law, co-worker, maybe even your BROKER. Don’t listen to them. Any of them. They aren’t there to save you. I’m not sure exactly what they are trying to do with the hysteria but saving you isn’t one of them. Think of it like this, if you find yourself in a rip current and two lifeguards swim out to meet you, would you follow the one screaming or the one who is calm and strong? Whichever one you prefer in that scenario is the one you should look for when the markets turn.

I’m not saying markets turning negative isn’t scary. Of course it is. This is your money and it evokes emotional reactions. Anyone who says they aren’t emotional about their money doesn’t have enough to be emotional about! That being said, just like being scared in a rip current is normal, the fear won’t save you but being calm will.

Yes, the market WILL turn on us all again and again. We don’t have a crystal ball to predict when this will happen. If anyone could do that, they’d have all the money! They’d literally have ALL THE MONEY. Ignore the “advisors” and media types who tell you they can predict the future and know that if you get off the beach and wander into the ocean, you will have to risk the danger to experience the beauty. You must deal with jellyfish, sharks, rip currents, reefs, and the cold, etc. But in the potential of danger also lies the reward. No one should go open ocean swimming by themselves. And when you find yourself in a situation where help is needed, be sure your “lifeguard” is experienced and calm. Because they will lead you out of danger so you can experience the beauty and rewards.

Will the markets turn negative this year? I don’t know. But if it does become scary, we will get through it together. Calmly and professionally until the rip current lets you go.

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