What a week! And it’s Thursday. Since last Friday, here’s what the S&P 500 has done every day:
Friday 2/2: -2.12%
Monday 2/5: -4.10%
Tuesday 2/6: +1.74%
Wednesday 2/7: -0.50%
Thursday 2/8: -3.75%
Wild! Honestly. It has been seemingly forever since we’ve seen any real kind of volatility. We went all of 2017 with nary a -3% drawdown ON THE ENTIRE YEAR! And here we are in the span of a week falling over 3% in a single DAY. TWICE. Hello, volatility. How good of you to drop by again. Thank you, sir, for the reminder that sometimes markets are crazy.
Do you know why markets are crazy? Because at their core, markets are people. Herding, hilarious, panic-and-greed driven people. Sometimes, those people write algorithms to trade stocks and bonds with some brilliant idea that they think will always make money, but it’s people all the day down. One thing that has been funny about this little downturn is that I really haven’t seen anyone try to come up with some plausible-sounding explanation for why this happened. The economy isn’t teetering on the brink of disaster. There’s no black plague outbreak anywhere. No inflation running rampant. It just happened.
I’ll be honest. Right now I am finding this highly entertaining. Perhaps that’s a coping mechanism. But really, how else should you approach this? It’s total madness. Clearly the value of these stocks is not changing 4% on a daily basis. In the short run, markets are wildly irrational. This is pretty good evidence of that. So, it’s a good chance to laugh at ourselves.
And when you’re done laughing, the next question is always the same: What should we do?
If you’re reading this, there’s a really good chance that you know I’m going to tell you not to freak out. Musk’s spaceman (with credit to Douglas Adams) is right: Don’t Panic. But you know that. YOU aren’t panicked. Other people, maybe. But you get it. This isn’t a time to lose your nerve or lose sleep or start pulling your hair out. This is normal. It really is!
But there’s also this part of you that can’t help but think – surely, we should be doing something. This has to be an opportunity, right? Buy when there’s blood in the streets, right? Be greedy when others are fearful, right? Here’s the boring, cold, honest truth: a few (huge) down days is probably not going to change a thing for a diversified investor. Maybe your portfolio went from 72% stocks to 69% stocks this week, and your investment policy was 70% stocks. So, you get to do: nothing. You weren’t too overweight at 72% to justify rebalancing out of stocks, and you aren’t too underweight at 69% to justify rebalancing in to stocks. I’m sorry. I know how it feels. You want to demonstrate that you’re cool and calm and levelheaded enough to take advantage of the crazy people around you. But are you cool and calm and levelheaded enough to stick to the plan laid out in your Investment Policy Statement?