Worried about the Market?
3 Reasons You Should Stay Invested
Let’s address the question I get asked most often these days. It gets asked in many different ways, but what everyone wants to know is when the market will face a massive crash.
We have lived through two crashes since 2000 and both caused the market to lose more than half of its value in each of those recessions. It has been said that the pain of loss is 2X greater than the equal feeling of joy from winning.
So let’s take a look…
Market Fundamentals: Bull markets do not die of old age.
Sure, I believe we are in the late innings of the second-longest bull market in American history. And this bull market shall come to an end one day too. It just doesn’t mean we will wake up tomorrow with a massive crash on our hands.
You see, the market and the economy have a special relationship. The market tries to predict the recovery of economic growth coming out of recession, but the market does not start to contract until the economy is already showing signs of weakness.
We use a group of mathematicians to help warn us of approaching recessions. Here is a chart from their June report that shows little to no threat of recession on the horizon.
As long as the recession forecast continues to stay below the red dashed line, it favors a low risk of recession.
Market Technical Picture – More Winners than Losers.
“If you can’t read the scoreboard, you don’t know the score. If you don’t know the score, you can’t tell the winners from the losers.”
Having been an athlete growing up, this quote from Warren Buffett often speaks to me. It is especially true in understanding the prevailing trends of the stock market. Market analysis is like a weathervane that helps us determine the general direction of the market.
When more stocks are going up in price vs. going down in price, it indicates a healthy market with broad participation. This suggests investors should be in the market.
When few stocks are going up, and many are going down, it identifies weakness and a point where investors should be cautious.
This next chart measures the advance (stocks going up) vs. decline (stocks going down) line over a 50 and 200-day average. When the blue line is above the red line, it is positive for investors. When the red line is above the blue line as seen in 2008 and late 2015, it is a time to be cautious.
Here’s the current chart:
As you can see, the winners are ahead of the losers, so it continues to support being invested in the market.
Have a Backup Plan
As we have shown above, if the fundamental (reason #1) and technical (reason #2) outlook points to being invested, that is what investors should do. However, an unforeseen event can and will happen without warning.
This is why we believe in having a backup plan. At Financial Analysts, our backup plan within our managed account strategies is the use of daily trailing stop losses. We monitor each position we own on a daily basis and when the price falls below a certain level, we sell.
Using stop losses help to limit the downside nature of the market while retaining as much of our profits as we can. This is where the concept of “let your winners run and cut your losses quickly” applies to investing.
As major blue chip indexes here in the US continue to hit new record highs, the fundamental and technical situation remains on firm ground. At this point investors should stay invested in the market.
As always, when the market facts change – so shall we!
P.S. -- Thinking about retirement? Check out our series on retirement planning. http://www.fainvestors.com/retire