The stock market correction should not be a surprise. (chart from www.finance.yahoo.com)(1).
Friday’s USA Today article entitled “Stealth bear market mauls Wall Street” (2) says there is mounting evidence that the U.S. stock market is being decimated and undermined by a so-called “stealth” bear market.
Anyone who reads this site for long should not be surprised that we are near the end of a bear market and what so many investors have called a “bull” is simply the third of a sideways pattern that began in 1999.
The article shows that big cap stocks in the S&P 500 index are down 22.6%, on average, from peaks hit in the past 12 months, mid size down 26.5% and the average small-cap stock is down 30.7% below its 52 week high.
I am not surprised if investors are surprised that last week, the Chinese Stock Market dropped 7% in one day, twice, and started this week with a 10% drop. I am not surprised that we are all surprised at Donald Trump’s success in the polls or at all the mass shootings or at North Korea’s aggression or at oil prices dropping so far or at the dozens of other negative ads the media screams at us each day. The greater the surprise, the louder the news.
Let’s think about surprise for a second because the greatest fear we have should be surprise. Surprise leads to stampede and none of us want to be caught in the midst of a runaway thundering herd.
Perhaps the most vital part of good investing is to create a plan to find and invest in good value. The second most vital step is to stick to this plan for the long term. Surprises can tempt us to abandon a good plan, usually at the worst time because we all have a narrative of thought that dictates the comfort we feel with our investment.
These facts and beliefs they select give us a belief that we are in control. The narrative creates confidence to choose and hold our investments.
When we are surprised by new facts, our beliefs can be threatened and the threat creates fear. When we feel fear, our brain takes control, pushes up our pulse, blood pressure and stress hormones and prepares for us to run. When surprised by bad news, an equity market can shift quickly. The shift creates a reinforcing negative loop that creates more surprise, more fear, more surprise.
Surprise plants the seeds for further surprises and 2016 has the potential for plenty of surprise. Expect turmoil and do not be surprised when the thundering herd starts to stampede.
If the stock market has a serious correction remember and stick to Golden Rules of Investing seven through eleven.
#7: Do not care too little about strategy.
#8: Turn on the auto pilot and normally add to your position.
#9: Do not panic.
#10: Do not let feelings influence you too much.
#11: Do not care too much about day to day volatility. The short term process of buying and selling takes too much time. This short term process leaves too little time to analyze and forecast.