Markets cause butterflies

May 13, 2022

If markets are giving you butterflies, you're not alone.

What a start to a year. All kinds of eye-popping stats. To list a few:

1. Data firms Bloomberg, Lipper note that only three other times in the past 20 years have investors pulled more than $35 billion simultaneously out of both the stock and bond markets.

2. The S&P 500 has averaged a bear market every 4 years since 1928. Yet this is close to the 4th bear market we've experienced in the past 4 years (though not quite).

3. Cash held by households, according to the Saint Louis Fed, surged by almost 5 times from the end of 2019 to 2021, and that was before the recent market drop.

4. According to the American Association of Individual Investors, peak bullishness was 4/21/21, or within a half year of the market peak (apparently the wisdom of crowds theory may be just a theory...).

5. And to top it all off, the Wall St Journal reports that as of May 6th, the broad bond market has performed worse in 2022 than any complete year since 1792, except one, which was 1842 and the country was in deep depression (though adjusted for inflation 9 other periods were worse). To put a visual on this, people were walking around with muskets the last time this happened.

But the news isn't all bad. It appears equity dividend payouts are on the rise for 2022, which we care about a lot. And because good investors drive looking through the front windshield and not the rear-view mirror, all those future cash flows are cheaper to buy today than they were in December. And investing is, fundamentally, the act of buying future cash flows.

Even though it's normal, all the jiggling and movement is disconcerting, particularly as it jiggles down. Let's look at a few ways to handle this emotionally.

1. Don't look. This is the classic "don't look at your statements or the market." This is, by far, the best behavior in any market, but I estimate that it's only possible for half the population of investors. The red and green data is simply addictive. Much of the progress we have made with indexing, if not all, has been offset by the proliferation of devices spewing too much information at people. Information easily leads to anxiety, and anxiety leads to poor investing.

2. #1 above may not work for you, and that is completely understandable. So, another technique: stay away from "high water mark psychology." If you register your net worth at the high point of a market, you'll struggle as markets inevitably fall and reset, which they will always do. Instead, if you look at your accounts, multiply the value by 70% in your head, and use that number. Everything above that 70% consider standard market fluctuation.

3. Our favorite approach is to watch your dividends and bond interest instead of the market. Scrolling down on this PDF, you can see why. Look at the stability of the cash flows over time. Actually, I should say the relatively stable *increase* of cash flows over time!

4. Talk to someone. Generally we don't recommend Uncle Jimmy, who, between rearranging sausages on the grill, is convinced "this sucker's going down." That's not going to help. If you're a client, talk to us, it's why we are here.

Dan Cunningham

<sup>1. St. Louis Fed - cash held by households
2. WSJ - Bond market since 1792</sup>