History has a way of not exactly repeating but rather rhyming. That also generally plays out in the stock, futures, bond and other investment markets. Look at the chart below. Investors and traders have been trying to predict tops and bottoms of a general investment market for more than several hundred years. I wish I could tell you that I was especially gifted at predicting the future on an exact date or point in the market, but that is not the case. If anyone could predict the market shifts with pinpoint accuracy it would still be easier, cheaper and more profitable if someone could predict the winning lotto numbers.
However, there is a difference between predicting lotto numbers and how the market performs. Humans are responsible for the overall market direction and generally, humans have not changed much in thousands of years. Sure we've got new toys and have landed on the moon, but we are still a population of people that respond to fear, greed and love. What that simply means is that the markets are generally a lot more predictable than inanimate objects flying around in a big bubble looking for a way out.
As humans, we tend to get fearful of both extremes in the market. When the market is dumping daily into the black abyss, close to previous market lows, we tend to let our imaginations run with panic that this could be the time when it truly collapses. And when the market is soaring to the sky and approaching the heavens close to previous historical market bull runs we tend to get nervous that the end is near. But to our often surprise when we get so confident and certain that nothing can stop the downward or upward momentum it often turns against our expectations and proceeds to fool the majority.
Even the best investors of all time have been fooled many times and hammered with losses. But one thing I have learned from those great traders and investors, before and now, is that as humans we tend to push the envelope on everything we do. I almost buy into the fact that as humans we just can't stop our selves from jumping off cliffs just find out what it is like.
So what does all this mean, you may ask? For one, when the candy stops being handed out you can be certain there will be riots and stress in the market. Investors are going to push the market envelope till it pops just to make sure it cannot go much higher. And that usually means the once calm and lack of significant volatility (i.e. how much the market moves around daily) will certainly change. Which I believe started last February. Secondly, when the general market volatility increases it often plays significantly on the fears and safety concerns of individual investors. It is often that this volatility exposes bad investor behaviors and as a result starts to shake out these bad investments. If only a few are caught in this shake out then the market will only temporarily make adjustments and then continue its trend. However, if the majority have made bad investments then the market will start a market plunge until the bad behaviors are expunged. And sometimes this process of expunging bad behaviors irreparably damages good investors as well.
So where are we now...? I guess that depends on your view of how much more candy can be handed out till its all gone. You can see from the chart above we are stretching into historical market highs, but the 1990's also show that the previous norms can be violated significantly. My view is that the market is hoping to see the 1929’s and 1990's all over again even if that means living in market non-reality and that type of hope is often not rewarded.
I expect now is the time to start putting your house in order and paying down any debt you have, because the tidal wave that is approaching will not be navigated with a boat full of lead weights (debt). The probabilities and pressures are mounting that you should know in the next year or certainly within the next couple of years whether your financial planner, wealth manager, investment manager or your disclosures with them was worth the weight in gold or not. I would be asking your investment professional what their plan is to navigate the next bear market and if they don't have a plan then ask them to develop one. Good relationships are hard to find so first do everything possible to keep the relationship strong. Only rethink the relationship if they refuse to develop one that you are comfortable with.
Your comments and thoughts are welcome…
John Hamel is the Managing Member of Austec Wealth Management, LLC. helping current & retired business owners optimize relative to their company value and personal life.