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Keep Calm and Follow Your Rules

Keep Calm and Follow Your Rules

| May 24, 2018

Over the last three months, since the first sell-off of the equity market on January 26th, I have experienced a higher than usual number of questions from friends I work out or golf with inquiring as to whether the bull market has run its course. The next Big Scary Thing is always just around the corner and the financial news industry will always be constructing billboards with 10-foot-tall, bold-faced type to highlight any potential bump in the road. After all, they earn a living by generating clicks, and an article titled “Don’t Worry, Everything’s Fine”, doesn’t generate many clicks – “If it bleeds, it leads.” didn’t become a newsroom adage by accident.

There is a commercial for an investment advisory firm that I saw, which ends “…reminding you that professionally designed portfolios aren’t affected by headlines.” While perhaps it would be more correct to say “…professionally built portfolios aren’t affected by headlines over the long-term.”, the basic premise is one that we would all do well to keep in mind. As surely as you can rely on the sun rising tomorrow, you can rely on the financial media hyping the next Big Scary Thing. And you can also rely on the fact that they are usually going to be wrong, and even in cases where the Big Scary Thing does happen, the consequences are usually not as dire as hypothesized. Take a look at the image below which shows some of the Big Scary Things over the last eight years against the backdrop on the SPDR Dow Jones Industrial Average ETF’s (DIA) $2 per box PnF chart.

Source: Dorsey, Wright & Associates, LLC

As the DIA chart shows, several Big Scary Things during this period had little or no effect on the market. DIA did not reverse down during the 2013 budget sequestration crisis, and even with all of the anticipation and speculation before the Brexit referendum, DIA recovered within a month after Britain voted to leave the EU. The largest drawdown DIA experienced over this period was during the August 2015 Chinese stock market crash, yet we can see that DIA was within two boxes of its May high by the beginning of November. The point here is not that troubling events or bear markets can't happen. The point is that the news is not a good indicator and having an objective, rules-based system can help you avoid falling prey to the noise, while remaining cognizant of the real signals the market, not the media, is giving you. Keep this chart handy and pull it out the next time Jim Cramer, et al., says the sky is falling.  With one simple picture you can readily see how overblown most so-called crises are.

One of the cardinal sins in investing is letting emotions take over. It's easy to follow the rules we have set for ourselves when things are going well, but it's when the going gets rough that we need the rules the most. Here at Petra Financial Solutions, we use a rules-based system and indicators like DALI, that tells us what the market, not the talking heads, are saying and lets us know when it's time to alter an allocation or raise cash in a portfolio. In doing this, hopefully, we not only offer some peace of mind to our clients, but also differentiate ourselves.

Until next time, cheers!