When crap happens

“We read your post ‘Hard to ignore’ earlier this week,” he wrote me this morning, “where you said… ‘and prepare for increased turbulence on markets, as changes like these never come smoothly.  Stocks could drop into correction territory (a 10% decline) between now and the end of the year, which should end up being a nice little buying opportunity.’

“That was scary. Reassure me.”

A few minutes after I read that, and replied, a call came in from a couple who had commuted a fat, seven-figure, public sector pension three years ago and were fully-invested in a balanced and nicely-diversified portfolio (up 5% so far this year).

“We need to go to cash,” he said. “Right now.”

Huh?, I replied, astutely.

“Can’t take it anymore. Bozo the Clown’s gonna be in the White House and this market is goin’ down. I want this money in my savings account. Yes, all of it. Now. Today.”

Logic was no defence, so he went ahead and did it – triggering capital gains taxes in a blizzard of unnecessary trades, selling off assets (like REITs and bonds) which actually go up when stocks go down, completely soaked in emotion. More evidence that of all feelings in our lives, fear’s the most potent. The greatest motivator. And when it comes to investing, the singular enemy of success.

The meme’s been growing that the crazy guy might actually win (thanks to his social media army), and equity markets will crash when it happens because (a) they don’t expect it and (b) they deserve it. Since his supporters are generally parochial (40% still live in their home towns), hate globalization, elites, politicians, central bankers, free trade, corporations and immigration, many would be happy to see Wall Street burn. It’s turned into a 99%-vs-1% thing. So part of the ‘Make American Great’ movement is to kneecap American capitalism and bring jobs back home by gutting companies. Go figure.

Anyway, there are two things every scared investor should remember between here and November the 8th.

First, he won’t win. (My know-it-all portolio manager colleague Doug Rowat will tell you why on Saturday).

Second, even if the crazy guy did blow into the White House in a shock surpassing that of crazy Britons voting in Brexit, anyone with a balanced and diversified portfolio could afford to ignore it, watching in amusement from the sidelines. Also recall that the fear of stock market corrections is way worse than the actual reality of them. The only people screwed when things go down are the weenies who sell into the decline.

Since 1945 (seven decades ago) there’ve been 56 minor corrections of less than 10%, taking an average of only two months to recover. The last one was Brexit. On 19 occasions we’ve had a major correction (averaging -14%) which disappeared after 4 months. In 70 years there have been 10 bear markets (a -35% return) averaging two years in length. The last one was in 2008-9. So an investor who didn’t sell lost nothing and had to wait – even in the worst of times – about two years to get her money back. Meanwhile the markets advanced 65% of the time.

But wait. Those stats only matter to someone with a 100% stocks-only portfolio – no balance and no diversification. The whole point of mixing equities up with bonds, preferreds, REITs and other securities, plus spreading it around geographically, is to avoid having all your eggs in one basket.

So how has a 60%-equity, 40%-fixed income portfolio done?

Way better. When Brexit cratered stock markets by 6% over a couple of days, the balanced portfolio lost just a little more than 1%, and quickly recovered. In 2008-9 the TSX was crushed 55% and took seven years to struggle back. The balanced portfolio lost 20% and rebounded in a single year. During the oil collapse Bay Street saw losses of 13% while the balanced portfolio temporarily gave up 5%. And over the last six years, which included the US debt ceiling crisis (2011) and the energy rout (2015) a balanced portfolio gained an average of 6.3% per year. So, if you snoozed through it, you won. If you tried to time the market, and missed by a few days, you suffered.

It’s worth remembering when stocks go down, bonds normally go up (money flows to safe havens) – so you should own both. Meanwhile some important stuff in a balanced portfolio, like real estate trusts, isn’t correlated to the stock market. Companies continue to pay their rents and investors continue to get distributions – plus an uninterrupted flow of dividends from preferreds and a little interest from bonds. The whole point is to reduce volatility and mitigate risk while still enjoying decent long-term growth and sleeping like your dog.

But anyway, the crazy guy’s toast. So you know what happens on the 9th, right?