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A Deep Breath & October Volatility

| October 11, 2018

Three main things are, in my opinion, causing market volatility we’ve seen on 10/10 and 10/11. Some overbought technology stocks, the lack of trade agreement between US China as well as rising rates have worked in concert to compound some market losses.

One thing to keep in mind is that the market and the economy are two different things. I think some of us need to turn off CNBC’s Squawk on the Street. These pundit shows point towards extremely active trading and makes the average person feel bad if they are not trading based on the newest iota of information. The average person doesn’t have the time, ability, discipline or knowledge to respond or not respond to these sorts of events. What’s worse, is these shows play into bad behavioral finance; if you’re not doing something to react, you’re helpless and loosing money. The reality is, the event has happened and you’ve already lost money. The only way to gain it back is to have your securities appreciate to make up the losses.

How can the average person respond to these sorts of events? There has to be something one can do. I think that something is to look at the economy (versus the market) and respond that way... Is the economy strong? How are wages, inflation, energy costs, credit availability, corporate profits? No huge red flags here. Headline risk? Maybe. Geopolitical risk and market P/E ratios? Maybe. But that’s a lot of balls to only a few strikes. So maybe this is a temporary disruption.

Until something systematic happens, for most people, standing pat and rebalancing (buy low, sell high) is a sound strategy. Timing in and out of the market can be dangerous; according to a recent DALBAR study, there is a 2.89% difference between an S&P500 index and the average equity investor’s returns from 12/31/96-12/31/2016. I think this boils down to bad behavior and essentially not staying invested when things get tough.