Rain or Down Markets?

I don’t like rainy days.  Heck, I don’t even like overcast days.  I don’t like them because—growing up in Southern California—I am fixated on summer activities like boating, swimming, biking, and camping…all outdoor fair weather activities.  Ask my sister, who used to live in Seattle, how much fun 30 continuous days of grey skies can be!  So maybe I’ve been a little shortsighted in my selfish desire for weather reports that forecast blue skies, light breeze, and a high of 85 degrees.  However, I am beginning to think that I’ve become a bit contradictory in my own rational.


You see, being a homeowner with a landscape to keep green, a swimming pool to keep full, and needing lakes to boat in, rain is an absolute blessing AND necessity for my lifestyle.  And in the same way that I must accept—even embrace—that precipitation from the heavens is a good great thing, investors must endure the mental challenge of maintaining course during the not so kind “negative” cycles of the financial market.  These unfavorable periods are how I used to view extended periods of consecutive rainy days.


March 9th of 2014 will mark the five-year anniversary of the bottom of the stock market during the ‘Great Recession.’  I remember writing emails, fielding endless phone calls, and meeting at clients’ homes in their dining rooms during that dark and unprecedented economic period.  I remember how the vast majority of my clients (and seemingly everyone else) expressed that they just couldn’t take it any more…”it” being the act of receiving monthly/quarterly statements showing them just how much value they’d lost since their last dismal statement.


Every day was worse than before.  People were losing their jobs.  Getting a refi on your mortgage was a thing of the past.  Homeowners were walking away from upside down financial situations.  Many of the great companies of America declared bankruptcy, while others scraped along near default.  Truly, these events forever changed the values of us Americans.


In retrospect, here we are five years later with the stock market at all-time highs, unemployment decreasing every day, our Federal Reserve tapering their bond buying, and housing values increasing to near all-time highs.


So I ask, “What did you do during those dark moments of 2008 and 2009?”  Did you surrender to your emotions and sell out during the bottom of the market?  Did your investment appetite for risk in stocks change so dramatically that you now will only invest in bonds, cash, money markets, and CDs?  Do you not believe in the American dream of owning a home that would be worth more than you bought it for AND paid off sometime in the future?  If you answer ‘yes’ to any of these rhetorical questions, we need to sit down and talk.


This summer is going to be a tough one for Southern California as we are in an extreme drought according to the US Drought Monitor. I know that eventually this region will receive its share of rain, but it is scary dry right now.  My family isn’t planning a mid-state Lake Nacimiento or Lake San Antonio waterskiing trip for this summer as those lakes are at 25% and 5% capacity as of last week.  I probably won’t be able to water my lawns this summer, but I will be able to keep water in my pool….at a higher cost.


My point is that markets and weather alike are not necessarily predictable, and they don’t always move in the direction we—as individuals—want.  With people starting to talk that a great stock market “sell off” is coming, they aren’t even sure when it will happen or by how much it will drop.  In fact, they’re not even 100-percent positive that it will happen at all.


Rain fills our aquifers, lakes, and water tables, and allows plants to flourish.  Rain is part of a normal weather system.  Stocks, bonds, real estate, energy, and commodities move up AND down, and this is how free markets work.  Volatility is part of a normal market.  If you sold your equity/stock/mutual fund positions when the market was down 40%, you not only locked in a loss, you lost the potential to gain it all back.  That may have put you in a very frustrating position where your emotions got the better half of you AND your assets!


I’m not selling my boat because there’s no rain, and I’m not getting rid of any rain coats.  And I don’t think you should react to future short-term market events that have little bearing on your average long-term real rate of return—if your investment is for the long-term.