The Boston area had been experiencing an especially mild winter until last Friday’s storm, which dropped around 7 inches of very heavy snow on the North Shore. We ended up losing the only tree in our front yard and another adjacent to the driveway. It’s heartbreaking to think that I planted those trees, while in the prime of my life, 20 years ago.
We’re also expecting up to a foot of snow Monday. Hopefully, this recent burst in precipitation is not going to mirror last year’s winter. The good news is that I’ll probably lose a few kilos snow blowing my driveway Tuesday morning.
For those of you who may not recall the winter of 2015, let me refresh your memory. We were experiencing a snowless season with moderate temperatures until the Boston area got submerged under nine feet of snow within a couple of weeks. That’s not a typo: nine feet of snow during a two-week period of time.
In a way, last year’s weather reminds me of the stock market. With the exception of a couple of minor bumps in the market’s jet stream, the S&P generated an average annual return of 9.8% over the past five years. As a matter of fact, we enjoyed a 32.4% return in 2013 and a five-year annual low of 1.4% last year. Things were looking good. Who could have suggested that we didn’t know how to manage money?
Then we tiptoed into 2016 and POW! The S&P took an 8% plunge in a little over a month. My wife, Marea, continues to be disappointed with my asset-management skills since her portfolio is down 0.31% so far this year. Think about it; her growth portfolio is only down a fraction of a percent, while the S&P posted a negative 8% return. Apparently, this 7 + percent differential isn’t good enough for her.
Sometimes you just can’t win.
How did she only lose 0.31%? In actuality, I began reducing exposure to equities back in 2015. No, I did not have a crystal ball; I was uncomfortable with market risk, so I began singing my fight song and retreated while lowering her portfolio’s exposure to equities. If I had been wrong, I would have given up practically all of the market’s gains. Alternatively, if equities went through a correction, she would outperform the market. Thankfully, Marea pretty much avoided the 2016 selloff.
So what’s my plan going forward and would I consider selling out of equities now?
No. I do not believe it makes strategic sense to reduce equity exposure at this point. I don’t see a funnel cloud on the horizon ready to hit the ground. On the other hand, I wouldn’t worry about a few scud clouds.
I have always viewed a drop in stock prices precisely how Marea reacts to a big sale at Nordstrom’s – a potential buying opportunity. The real question becomes: when is the right time to begin putting cash to work? Or put another way, how close is the market to hitting an updraft?
Frankly, no one can accurately time the market. Therefore, I plan to slowly put cash back to work in equities. Estimating a market bottom isn’t necessary with this approach.
To draw a comparison, let’s think about when we decide to do our holiday shopping. Some shop sales year round; others begin buying gifts early in December, and some are last-minute deal hunters. Many of us even hold on to some cash for the “after Christmas sales.” With all of the buying opportunities, we don’t need to be precise forecasters, and pretty much everyone still wins.
The identical principal applies to the stock market. In time, we will hit new market highs. The only question is when? Rather than guess, I’ll probably begin adding cash to stocks at some arbitrary point over the next couple of weeks.
I believe that over the long term, we can’t lose. No need to fear problems related to the Chinook or Santa Anna winds.
Will we experience another snowstorm that drops over a foot of snow on my driveway over the next couple of months? You bet! That’s why my snow blower will be resting comfortably in my garage with a belly full of gas. Will we experience days in the near future when market thunderstorms cause the Dow to plummet 200, 300, or even 400 points? Probably. And, that’s exactly when I’ll put on my galoshes and buy!
Eventually, this market will turn around and climb to new highs. You know it always does. Then, while many investors are doing their happy dance, I’ll begin the slow process of unloading equities.
The biggest problem we have as investors is emotion. Anxiety, fear, and excitement can cloud judgment. The key to a successful investment strategy is objectivity, which is exactly what a financial professional is trained to bring to the table. Like meteorologists, they may not be able to exactly predict the weather, but they can certainly let us know when to be prepared for a tornado or when sunnier days might be on the horizon.