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Crashes: Predictably Unprecedented

March 16, 2020
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As you know, the last 3 weeks have seen some of the most prolific declines in the history of the stock market. Your portfolio has been hit, my portfolio has been hit (my invested portfolio is built with the same funds I recommend), and any investor who's built a sensible strategy would have been hit.

Do I think we'll bounce back?

Of course, and it will start to happen when we think things can only get worse.... that's how it always works. 

Still, it's been painful.

Perhaps adding to that pain is the fact that clients of our firm receive WEEKLY performance reports in their inbox every Sunday morning, despite the fact that we're all on a long term plan.

Why send a weekly gain/loss report if we care about the long term?

Because even though our financial plans are for the long term, our lives are lived in the short term...and I want you to have full transparency and clarity about the short term challenges we face. 

On days like today (Sunday March 15), the weekly news was really bad, but necessary to know. In fact, I need clients to understand the true scale of market volatility so that we're able to move forward with confidence. The painful lessons of today will be our strength in the future... Just ask anyone who stuck to a plan through 2008-09 and then experienced the subsequent bull market of the last 12 years. 

I'm impressed with investor discipline up to this point and my conversations with clients have been very promising. While people are scared and the declines are unfortunate, the understanding of our long term plan is front-of-mind for most of us. This is the right mindset but it's very tough to maintain, which is why I keep sending these emails.

When this volatility began, I started spamming you with data about market declines, average length of bear markets and corrections, the average time it takes to rebound from the pullback, how markets have behaved during pandemic circumstances, etc.

(as a refresher, here are the first and second emails I sent last week about market declines amid this bear market)

I stand by that data, but I also have to acknowledge this one truth: 

This is unprecedented. 

...But when Lehman collapsed it was also unprecedented.

...So were the 9/11 terrorist attacks

...So was the 22.6% crash we saw on Black Monday in 1987

We now have the luxury of those declines and the subsequent market response to aid in our decisions. This is why we have confidence in a future rebound. 

The recent retraction into a bear market was the quickest in history, taking only 19 days, and it was the first pandemic-driven bear market. 

The data always feels insufficient in the face of unprecedented events, but then history tends to show that it was mostly reliable. 

...Okay, now on to just a little bit of history: 

The image above is from Black Thursday in 1929 when panicked investors sent the Dow Jones Industrial Average down 11 percent at the open. Black Thursday began the Wall Street crash of 1929, which lasted until October 29, 1929.

Before the Exchange opened investors were already panicking. The Dow had fallen 4.6 percent the day before and the stock market had already fallen nearly 20 percent since its record close on September 3, 1929. 

On Monday of this week I sent some data about historical pandemics and market rebounds and also included a story about market turbulence

On Tuesday I sent some data about how quickly markets have historically rebounded after bear markets and also what can happen to returns when we omit the best trading days each year

On Wednesday the market rallied in a big way so I didn't send anything. 

And then there was last Thursday...

Black Thursday v. 2020. 

But don't just take my word for it, there's already a Wikipedia page:

The catalysts for each of these Black Thursdays was unique, but the conditions were oddly similar (record declines after a prior 20% drop). 

For some quick history, here's every decline of 20%, and following rally, over the last century:

Not pictured above: The current pullback, AKA the Coronavirus Bear Market, AKA the Fastest Bear Market In History. 

As you can see above, there is A LOT more blue (growth) than there is red (decline) and we've already endured a rapid 20-25% decline through this.

Here is the length of every historical bear market.... You can see the most recent one listed at the top: 

I'm always going to come back to the data, to a plan, and to stripping out the emotion from these scenarios... It would've worked in every other challenging environment.

When things are good again we'll be stronger investors who are ready to march forward with new data and experience to invest with.

But on a more human note...

The reality of the Coronavirus is becoming apparent and it’s important to remember that we have a lengthy history of rising to this type of obstacle. Covid-19 is now the priority of researchers all over the world and they are better equipped and more knowledgeable than ever about how to deal with the challenges we face. So, use wisdom. Take the necessary precautions and follow the recommended guidelines to help prevent the spread of the virus, but do not give in to panic. And know that, in the words of FDR, “this great nation will endure, as it has endured, and will revive, and will prosper.”

I know it's tough out there and you're probably losing sleep.

Just hang in there with me, you have time.