Fintech executive, writer, math geek, and investment systems developer. Founder and CEO of Altruist and Founder of FormulaFolios.

Market Update: How to Stay Cool in Turbulent Markets

Market Update: How to Stay Cool in Turbulent Markets

Not that most of us need a reminder of how bad financial markets have been the past few weeks, but it's been downright terrible. Here's a snapshot of how the major markets have fared the past 30 days:

Outside of cash in the bank (or in a can, or under the mattress); everything is down. Some assets quite substantially.

On this blog, and to my clients, I always advocate a well balanced conservative portfolio. Over the long term this is prudent advice, but in this most recent short term, it's been bullied some too. Per the chart, you can see that even bonds are down 3.27% over the past 30 days. It's better than the 6% loss in stocks, 7.2% loss in gold, 10.5% loss in international stocks, and 12.4% loss in real estate; but still a frustrating blow.

For the trailing 12 months this market correction has pushed every asset class other than US stocks into negative territory. Pretty odd, considering just a few weeks ago the stock market was at an all time high and many investors were feeling pretty euphoric.

Looking forward, there's a lot to digest.

Will the markets continue to tumble? Should investors sell everything and just quit? Will the market bounce back? What will the Fed do?

All very good questions.

I've put together quite a bit of information in today's post. Mostly as a reaction to client and blog reader reactions. Everyone seems to be concerned, and rightfully so. It's pretty distressing to see accounts drop, even if after a solid year (or more) of gains.

So let me break this post into sections. This first section is a recap video. It shows how the market got to where it is, and where I think it goes from here. I also discuss the importance of controlling emotions in times like this.

It is crucially important to remember this: The big Wall Street traders WANT you to panic. They want you to sell everything off and drive prices lower. Just like a few weeks ago they wanted you to buy. They wanted everyone to feel like they had to get "in the market" or you'd miss out on the big gains.

Please don't fall for that non-sense. Remove emotions about money, do what is statistically smart, and know that corrections are very normal. The video shows that very well.

Why Are My "Safe" Bonds Losing Value?!!!

Part two of this post is specifically about bonds. For those that don't know, my firm mostly works with conservative investors near or in retirement. As such, we use bonds quite a bit as the foundation of our long term investment strategy. Done correctly, this is very powerful. However, bonds do move just like stocks do.

When you get statements/reports the value of the bonds changes every single month. These changes are a reaction to traders (who love volatility) and interest rates. When interest rates rise, it has an adverse short term impact on bonds. In the long run it's exactly what we want. Higher yields = More interest from your investments. But, we have to be patient as while the rates are going up our bonds market value will decline.

For those that want a great history of how bonds have fared (and how they might fare) when interest rates rise substantially, there a great white paper available here:

http://www.advisorperspectives.com/newsletters12/pdfs/Must_Bond_Investors_Fear_Rising_Interest_Rates.pdf

Unfortunately, bonds do fall when interest rates rise. That's apparent both arithmetically, as well as with what investors have seen the past month. However, it's not quite the way some people make it sound.

For example, in simple terms, there are doomsayers who say if interest rates double - bond prices drop in half. That would only be applicable if it happened all at once, which has never happened. Rather, interest rates tend to rise (and fall) over long periods of time. For example, it took 7 years for rates to double in the 1960's; and it took 10 years for them to drop in half in the 1980's. Most recently, it took 14 years for them to drop from 6.25% to the current rate of 2.58%.

In Closing

It's normal to get uneasy feelings when financial markets don't cooperate. They don't always go up, and when they go down, it seems like they'll go down forever. Good news - they don't! The key to being successful as an investor is to do your absolute best to control your emotions. Carl Richards over at Behavior Gap says it well with simple illustrations like this:

Copyright BehaviorGap.com

Copyright BehaviorGap.com

Mr. Richards go on to share:

In my conversations about money, the most common desire people express is a simple desire for peace. We all just seem to want to get out from under the constant stress that so often comes whenever we talk or think about money. Money is insanely emotional because of what it often represents. When we talk about money we are talking about our closest-held dreams and goals.

…While it is often a rare event to be thinking about money while at the same time feeling peace, let’s all hope we can make decisions so that it happens more often.

Warmest Regards,

Jason Wenk

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