Why The Experts Didn’t Tell You About The Stock Market Correction Before The Fact

A little over a week ago, we took a family trip up to the Gold Coast – Surfers Paradise to be exact. We were supposed to have a week of sun, beach, and fun. Leading up to our trip, we would constantly be checking the weather (as you do). The closer we got to our trip, the worse the weather forecast – 90% chance of rain, thunder, and humidity, for 6 of the 7 days. Queensland’s Gold Coast has around 300 days of sunshine per year, that’s a 82% chance of a sunny day. Unfortunately for us, we got caught up in the 18% of no sunshine. In fact, torrential rain and wind.

As you probably know, I love my charts and tables, so here is the rainfall report for the month of October (in millimeters). I have highlighted the days we spent in Surfers:

Source: www.weatherzone.com.au

Yuck – enough said.

The stock market is offering similar odds – a 75% chance of a positive return in any given year, and a 25% chance of a negative return in any given year (it has done so over the last 100 years).

During our time away, the stock market went a little crazy (as you probably saw and heard), down 3.30% in one day, and 5.27% over two days. Here’s the chart:

Source: Yahoo Finance

The sell off on the 10th of October was in fact just the 98th one-day drop of 3% or more for the US stock market since 1952, and the 20th time we’ve seen a one-day drop of 3%+ since 2009 (that’s about 2 per year for the last 10 years). Here’s a fun fact for you, it was just the 14th time it has happened on a Wednesday – here’s the chart:

Source: BIG

Other than the beginning of 2018, we haven’t seen this much turbulence in the stock market for some time now (see VIX below), in fact since June 2016 – no wonder investors were nervous. We’ve had such a relatively stable and non-volatile stock market during this time, that investors have become accustom to something that is not normal.

Source: Yahoo Finance

Since the sell off of last week, no doubt you have read and heard all the “after the fact” explanations in great detail – what happened and why, with utter certainty.

What led to the stock market sell off was so obvious – how could you not have seen it coming? And we didn’t want to spoil the fun by providing an explanation before the sell off either.

It was the Fed’s monetary policy and raising of interest rates? Or maybe it was elevated stock valuations? Oh wait, it was probably President Trump and his many “wild” policies. No, no, it was a strong US dollar, or the risks inherent in emerging markets, surely? But didn’t we know of, and aren’t we all aware of these risks, and have been for some time now? How did they startle markets overnight?

Human beings seek certainty. We seek predictability, rationalisation, and for things to unfold in an orderly fashion. Unfortunately, as we all know, life does not work this way, let alone the stock market I’m afraid to say. Yet each and every day, we turn to the so called experts and gurus to enlighten us with what just happened and why.

So what can investors do?

Accepting the facts is a great place to start. And for most of us, the facts are:

  1. To invest means we must take on some level of risk.
  2. The amount of risk we decide to take will likely influence our return.
  3. Risk means not knowing. Not knowing what tomorrow brings. Not knowing when the market will collapse. Not knowing when the market will recover. Not knowing when we’ll encounter our next recession.

In the 1927 book “Security Speculation – The Dazzling Adventure,” Laurence H. Sloan repeated the now famous anecdote about J.P. Morgan’s view of the stock market:

History has it that a young man once found himself in the immediate presence of the late Mr. J. P. Morgan. Seeking to improve the golden moment, he ventured to inquire Mr. Morgan’s opinion as to the future course of the stock market. The alleged reply has become classic: “Young man, I believe the market is going to fluctuate.”

No one really knows what the market will do from here. Whatever it does, we cannot control. What we can control is how much we are prepared to expose ourselves to the game – the game we cannot control. We can control costs and expenses, and we can control our behaviour and discipline. This has been proven again and again in the data.

You can sit there and lend an ear to the gurus who provide you the ‘after the fact’ rationale you so desperately seek. People sound and look smarter by providing it to you too – I truly wonder where they were the day before. If it was so obvious, why didn’t we see it coming?

The reality is simply this: Markets are random. The stock market is driven by fundamentals over the long-term, and sentiment over the short-term.

Once you make a decision to invest, whether it be a trip to the Gold Coast, or in the stock market, you’re also making a decision to accept the risks – the weather on your trip, and the ups and downs of the stock market. Cancelling your trip because of the poor weather, or withdrawing your funds because the market fell 10% is a sure way to lose money.

This bull market has been running hot for 10 years now, and investors seem to have gotten cozy in their seats. We all know bull markets don’t last forever, and if the events of last week made you a little nervous, you probably should revisit what you’re doing and why.

Invest your portfolio today as if the market will collapse during your sleep. Because one night it will, and what you do next will either leapfrog or destroy your financial wealth.