It is almost exactly a year since the trough of the pandemic related sell off. It was bleak or to be a little more tongue in cheek, it put the ‘Rough’ in Trough! This was the chart everyone was staring at around the middle of March last year. This was the end of the world as we knew it. (For much of the discussion below, I will round off the index points and time periods for purposes of illustration).

After peaking around 3400 index points, the selling was relentless and the market around the middle of March had breached 2200 index points to the down side, the lowest since 2016. It had erased 4 years’ worth of gains in a matter of weeks! It had breached the 2009 bull trend, and no-one knew where this would go.

Yes, hindsight is perfect, and many prescient seers are now proclaiming that it was the obvious trade of the century because – ‘stonks’ always go up. Well as someone who lived, invested, and traded through 2008, I can tell you, they DON’T. And when you sit staring at red screens day after day watching your portfolio, years of wealth creation and hard work melt away, it is hard!

While many thought it would bounce, the fact is NO one saw this coming! From the trough to recent peaks, the S&P 500 is up a staggering 80%! For an asset class which history tells us should deliver 15% p.a., this is mind blowing.

In fact, if we take the last 20 years, from the troughs of 2002 to present levels, the S&P has delivered a relatively sub-par 7.5% p.a. Sure, you can throw in a dividend yield of give or take 3% to round it to a nice 10% and some change. For context, this means that the last year has given investors between 5-10 years’ worth of returns in 12 months!

Now, about 3 weeks ago, prior to the recent correction and yield tantrum, I wrote about my reservations of where valuations are currently as well as the risk flags I am watching (see Risky Business).

Markets routinely deliver corrections of around 10% before resuming their uptrend. History is littered with these. It doesn’t show up well on a chart because 10% of an index at 1500 is 150 points, and barely registers on an index at 4000 points. These are tactical corrections and can be used to select better entry points in stocks you like, etc. These are not the corrections that concerns me.

But, again, even to assume that the market is to return to its long-term trend line from 2009 or even a more recent trend from 2016, this would imply a correction of between 15-30%! The point is not whether we see this or not. There is little value in predicting the future and pretending to have a crystal ball.The point I am trying to make stems from the angst I saw (especially on social media timelines) in the last 3 weeks from a generation of newly minted investors who struggled to even digest a 6% correction over 3 weeks. Markets and investing are not for the faint hearted. I always say that it’s a marathon, not a sprint.

For illustrative purposes, the table below contains some of the corrections in the S&P 500 over the last several decades. They vary from your ‘garden variety’ 10% tactical blow off to deep ‘world shattering’ corrections like the Global Financial Crisis (markets actually peaked in 2007, before the crisis so the peak to trough looks worse than the direct GFC crash).

It also contains the time taken to recover to the previous peaks and these range from 1 month around the Asian crisis to 7 years in the case of the dot com bust.

What am I trying to get to? I am trying to say that investing is a long-term game. The purpose of investing is not internet memes and diamond hands. It is building wealth in a sustainable and responsible way that goes into creating multi-generational wealth. Also, if you’re in it for the long haul, you will quickly learn the benefit of being able to sleep easy at night and not watching your positions every second via your smartphone app.

The nature of technology today has democratized markets and made them accessible but what it can’t give you is the psychological grit and temerity to ride the peaks and troughs and to keep chipping away.

Sure, I was concerned a few weeks ago. Did I sell all my stocks, No. I de-risked by selling some positions, and reallocating to new ideas. I also used a derivative overlay (put spread) to limit my downside. I do these tactically because, I live, eat and breathe markets but also because I believe in the companies I am invested in. I then slept soundly and other than the usual grumpiness of watching red screens, I did not have a portfolio existential crisis.

I aim to keep buying quality stocks I like for the long haul. Sure, I will have a go at a few speculative names for a small portion of the portfolio but the rest of the portfolio is invested in solid companies which wont rocket by 100% overnight but will earn me good earnings growth and growing dividends over time.

So ask yourself. Do you sleep easy at night? If you don’t, assess your risk profile and structure your investment strategy accordingly. However, if you’re not a least a little antsy, maybe you aren’t taking enough risk (I’ve been through this too). Remember you’re in this for the long haul and if markets correct properly (look at the table above), can you take the pain and stay standing to ‘fight another day’.

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Our content is intended to be used and must be used for informational purposes only. You must do your own analysis before executing any investments or strategic decisions, based on your own circumstances. We do not provide personalised recommendations or views as to whether an investment approach or corporate strategy is suited to the needs of a specific individual or entity. You should take independent financial advice from a suitably qualified individual who gives due regard to your personal circumstances. Whilst every care is taken, we accept no responsibility or liability for any errors or omissions in any of our content. The views, thoughts and opinions expressed in our content belong solely to the author or quoted individuals and/or entities, and not necessarily to the author’s employer, organisation, committee or other group or individual, or any of our affiliates or brand partners.

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MK White

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