Don’t panic. The S&P 500 is up 16% YTD. IT’s down less than 4% from recent highs at the time of this writing on 9/30/2021. Why did it seem like the sky was falling last week with the Evergrande story? And again, this week, we got another jab as interest rates spiked and government shutdown loomed?
Feels Worse Than it Is
We are down less than 4%. But it feels so much worse because the market has been so steady, lulling us back into a state of complacent bliss. Since May, we haven’t had a more than 2% down day (before the Evergrande tantrum last week), and the market has been within 5% of its high for over 220 days. The chart shows that the market is not even going to break that streak even though it looked sure that it would.
Don't Panic
I heard a few anecdotal stories from folks telling me they had a friend or knew someone who bailed on the market last week amidst the Evergrande rumble. There can be reasons to sell. This isn’t one of them. But I fear that the market has been so strong for so long that it has cultivated a class of investors who think this is an easy game and are financial geniuses. How will they feel when it gets painful, like a 10, 15, 20% correction? It will be an excellent lesson for many younger investors to learn.
Young Investing Careers
My investing career has spanned the entirety of the bull market to this point. I was in high school during the financial crisis in the late 2000s, so I was too busy doing stupid stuff to be paying close attention, let alone have any idea of the pain that an actual market sell-off could bring. My battle scars have come from picking big stock winners, putting too much on them, and then losing my face that way.
Successful Risk-Taking Means More Risk-Taking
But all of my mistakes were made in a backdrop of a strong and steady, if not raging, bull market. What about the swaths of people that have never experienced a deep correction? All the people close to my age who have been saving into 401ks have had an enjoyable investing experience. And now, perhaps we have some more discretionary income, and we try our hands in individual stocks or crypto. The result is that we have been rewarded every time we dabbled until we dabbled and dabbled to the point that any by-the-book financial advisor would look at our asset allocations of 40% crypto, 20% Tesla, and 40% other random stocks, and say, you are downright crazy!
Confirmation Bias
All of the confirmation bias that has been engrained in younger investors is troubling to me. And when the market finally does something, as it has in the (distant) past, where it is death by a thousand cuts during a long-winded bear market, ill be curious to see how many diamond hands lose their shine at that point.
Gut-Check your Investments
I think there’s never been a better time for investors to gut-check their investments. You’ve done well to this point. You’ll do exceptionally well now to preserve it, so when the market is ready for its next significant leg higher, you’re not thinking about just crawling back to where you started. So, if this recent volatility has in any way given you anxiety, fear, or kept you up at night, it might be time to stress-test your portfolio and plan for the next ten years.
