Market Corrections & Investing Strategy

After a rocky October for investors, I want to share some thoughts on the current state of the markets and the immense value of a long-term investing plan.

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The news for investors was pretty dire last month. Here are a few of the words and phrases you may have seen in the headlines:

• Wiped out
• Tumbled
• Erased
• Slumped
• Worst

Not really the words you want to see when you’re reading the Business & Finance page of The Wall Street Journal.All the major stock indices either entered or approached correction territory. A market correction is loosely defined as a 10% (or greater) drop from a recent high.The NASDAQ officially saw a correction, while the Dow Jones Industrial Average and S&P 500 each dropped 8-9% from recent peaks and briefly went negative for 2018.Let’s take a quick look at some charts of the S&P 500 over the last month, year, and five-year periods for a refresher on where we are and where we’ve been.Here we are for October 2018. Not good, but at least we had a little rebound towards the end of the month.The next chart is 2018 to-date. A little better than the last one – the data line is green, indicating that the S&P closed on November 1 higher than it started in January. But we can see just how hard October hit the index, wiping out most of the gains that had been made since the beginning of the year.The five-year chart below probably makes us all feel a lot better, but it’s clear that the October 2018 correction was as big of a short-term drop as the S&P has seen in the last five years.October was certainly bad news for short-term traders looking to make a quick buck. But if you are an individual investor planning for the long run -- and remember that, even if you’re already retired, retirement is long -- then the recent losses don’t necessarily mean you need to change your plan.Of course, that assumes that you have a plan.There is nothing quite like a market correction to illustrate the value of a long-term investing plan.Long-term goals help you see the big picture without getting too caught up in the moment. Additionally, the process of drafting a long-term investing strategy should help you learn about and internalize investing basics like diversification, rate of return, and the fact that market volatility is normal.When you’re familiar with these aspects of investing, it makes it much easier to remember that when the markets drop, the best course of action is often the simplest one of all -- just ride it out.

Getting Started with Stocks

When you’re new at something, it can be hard getting started.You might start without much experience, and maybe your first try doesn’t go too well. Or you decide to do loads of research so you can start out perfectly, but you don’t have time, so you never start in the first place.I fell into both of these traps when I first started gardening. Here are some lessons I learned as a novice gardener that can help you get started as a beginning investor.

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I wanted to make my yard pretty, so I went and bought some plants and flowers that I thought would look great. They sure looked beautiful on those little cards they came with!One Texas summer later, almost every one of them had shriveled up.The next year, I decided to put together a plan. I was going to find the perfect plants for each part of the yard based on sun, shade, water, you name it. I would make sketches of the front and back yard, chart it all out. I would start perfectly!But I couldn’t find the time for all that planning and I didn’t start at all.Finally, I decided that I was just going to pick one kind of plant that could probably make it in this climate, and see what happened. I knew it would have to be something low-maintenance, because I hadn’t yet proven myself as a seven-days-a-week gardener.I settled on succulents. They look beautiful, they last a long time, and they don’t need much nurturing.Today I have dozens of potted plants on my front porch and I spend an hour or two in my yard every weekend. I’m not a master gardener, but I’m really glad I got started. I love working with my plants when I have time, and just seeing them makes me happy every day when I get home from work.This is a lesson I always try to teach aspiring investors.In the beginning, the most important thing is to find a way to get started.Of course you don’t want to throw your money into some random investment without any research or guidance. But you also don’t want to put it off indefinitely until you have the perfect strategy.I talk to people all the time who wanted to start investing years ago but never got around to it. They didn’t think they had a good enough plan. They didn’t think they had enough money. They didn’t know what investments to choose.There are always lots of reasons not to start investing. But if you want to have enough money to retire someday, you simply need to find a way to get started that’s going to work for you. As soon as possible.Don’t try to be the perfect investor, don’t put it off until you have the perfect investing plan, and don’t wait for the perfect time.Just get started.Save some money, do a little research (or consult with an expert), and pick some investments.The reason it’s so important to get started investing sooner rather than later is because, thanks to the beauty of compounding, time itself is a crucial ingredient of successful investing. The sooner you start investing, the more time you have for the returns on your investments to compound over a longer investing horizon. That means more money for retirement when the time comes.And if you’re wondering what your first investment should be, I still think ETFs are a good option for beginning investors.So, do NOT ask yourself: Do I have the perfect plan to start investing?Instead, ask yourself:

How do I create a plan that’s good enough to start investing?

Buying Stocks at All-Time Highs

Conventional wisdom says Buy low, sell high. So if the markets are all sky-high, this can’t be a good time to buy… can it?Oddly enough, this reminds me of something from my former life as a college basketball player. Let's see if a trip down memory lane can help me sort this out.Growing up in my family, basketball was a pretty big deal. My sisters and I all played from youth league through high school, and three of us played in college.I played all four years at Washington University in St. Louis. It wasn’t the big leagues (WashU is a Division III school) but we were pretty darn good. We won the national championship each of my four years, and our overall record was 116-4. During one stretch, we didn’t lose a single game for nearly three years.But despite all of our success, when I think back on my college basketball experience, the first memory that comes to mind is one of the few games we lost.It was halfway through my senior year and I was a team captain. We had won 81 games in a row and were seven wins away from breaking UCLA’s all-time NCAA record of 88 consecutive wins, set in 1970-74. (A record since broken by UConn, but I digress.)For those of us who were seniors, we hadn’t lost a game since we were freshmen. The rest of the girls had never lost in college.During our three-year win streak, we had flown all over the country dozens of times. This game was literally right down the street, at Fontbonne University in St. Louis.Everything pointed towards us winning that game.We were three-time repeat national champions. We had the best player in the country, who was later chosen as the best D-III athlete across all women’s sports that year. We had a great coach, Nancy Fahey, who is now in the Women’s Basketball Hall of Fame.But we didn’t play well. And we lost.It was devastating. We felt like we let down all the girls who had come before us and built that winning streak over the previous three years.But it was also instructive. It reminded us what it felt like to lose, and it taught us that games don’t win themselves.I’m happy to say that we bounced back after that game. We went back to work, made the playoffs, and finished the season with another national championship.But that loss to Fontbonne is an example of something I think about every day in my job.There’s no perfect way to predict the future.Over the last week, the Nasdaq and S&P 500 both hit record highs. The Dow Jones traded within two percent of its all-time high.Conventional wisdom says Buy low, sell high. So if the markets are all sky-high, this can’t be a good time to buy… can it?Maybe this is a good time to review my basic investing philosophy.1.  Invest for the long term.2.  Do your research or consult with a professional advisor before choosing investments.3.  Make investment decisions based on where you are; not where the markets are.That third point is just as important as either of the first two. If you are five years away from retirement, you should be making very different investing decisions than if you are just beginning your career. (See my piece on “Stocks, Volatility & Expectations” for a refresher on when to buy low and when to sell high).Asking the question, "Is it wise to buy stocks when they’re at an all-time high?" is just a different version of a basic market timing question, "Is the market going to go up or down from here?"So, is the market going to go up or down from here?In the short-term, I don't know. It's too difficult to predict. Stocks could keep charging up or they could cool off.But as I mentioned back in January, I keep as close an eye on earnings as I do on price. With earnings at or near all-time highs thanks to a combo of a strong economy and lower taxes, stock prices at all-time highs are not out-of-line with what we would expect.So let’s specify a longer time frame for our question:Over the next decade or two, is the stock market going to go up or down from here?Let's look back before we try to look forward. Here’s a chart of the S&P 500 from 1950 until May 2018. The green coloring represents months when the index closed within one percent of its all-time high.https://engaging-data.com/market-all-time-highNote the long-term pattern: Growth, crash, sideways volatility, then growth again. When a long sideways market ends, it can be followed by a growth period that lasts 15-20 years. We call this a "secular" bull market.There is no guarantee this pattern will continue in the future, but secular trends paired with the earnings data that I mentioned before are two key pieces of information that give me confidence.If you're not quite as confident (yet), here are some tips to help you systematize the stock-buying process:•  If you still feel nervous about buying at all-time highs, then establish a price you feel more comfortable with.•  Write it down.•  Make sure you actually hit the "buy" button if/when stocks hit your price target.Regardless of whether you buy now or whether you try waiting for a dip, history suggests that you have a great chance of seeing some solid returns over the next 10-20 years.

Facebook, Stocks & Diversification

If you’re like me, sometimes you need a dramatic event to remind you about risk.Last month, I found myself face-down in the middle of a basketball court, trying to figure out where I was bleeding from. Do I still have my front teeth? This could be very bad.It turns out that my teeth were okay, but my chin was busted open. After a trip to urgent care for six stitches and a wrist x-ray, I was banged up and bruised, but basically fine.After my accident, I started thinking about all the basketball-related risks that I’d discounted, forgotten about, or never even considered. After successfully avoiding major injury for 31 years, I assumed that I’d just continue avoiding injury for the next 31 years. Big mistake.In my case, risk manifested itself through a bandaged face, a big unexpected medical bill, and the inability to swim with my kids on a long-anticipated family vacation.If nothing bad happens for a while, you might forget that something bad can happen. In the stock market world, Facebook was a good example of investors being lulled into a similar sense of complacency.That all ended with a bang two weeks ago when the social media giant’s stock plummeted in the biggest-ever one-day loss in market value for a U.S.-listed company. Facebook shares fell 19% and the total value of the company fell by ~ $119.1 billion. To put that into context, the entire market cap of Starbucks is only $70.3 billion.Single-stock risk is real, and it’s a risk that MUST be taken mindfully and with full understanding of the consequences. Any investor whose portfolio was heavy on Facebook would have seen extraordinary gains over the last five years. But on July 26th, the value of that portfolio could have fallen by nearly one-fifth.For those who aren’t interested in seeing their portfolios fall by 20% in a day, there’s an easier way -- diversification.Over the long term, diversification should deliver reasonably high growth while mitigating single-stock risk. I wrote all about it last fall, check it out for more details if you missed it.

Receiving an Inheritance

Giving a gift is a beautiful gesture. It’s an attempt to make someone else’s life a little bit better in a meaningful way.Receiving a gift, on the other hand, can be awkward. While most people appreciate the gesture of being given a gift, not everyone loves every gift they get. This can cause the recipient to worry about seeming ungrateful or hurting the gift-giver’s feelings.Luckily, there are two things that keep the stakes pretty low for most gifts. First, the amount of money involved is usually relatively modest. Second, the gift will often come with a gift receipt.The gift receipt is a wonderful invention. It gives the recipient permission to accept the gift but exchange it for something else, without seeming ungrateful or hurting the gift-giver’s feelings.An inheritance is a gift.It’s an attempt to make someone else’s life better in a meaningful way. However, the amount of money involved and the circumstances under which it is given can make it a difficult gift to receive.One thing I consistently notice is that when people receive an inheritance, they often feel reluctant to make any changes to the investments in the inherited portfolio.This is fine if the inherited investments are a good fit for where you are in your life.If the investments have been thoughtfully managed in recent years and include stocks of companies that have bright futures, you might not need to make significant changes.But what if the inherited investments aren’t a good fit for you? It’s not uncommon for people to inherit stock in companies that were industry leaders a generation or two ago but aren’t in a good position to compete moving forward. Those stocks might reflect investment decisions made 40 years ago.If the investments aren’t a good fit for you, try to give yourself permission to modify them.While an inheritance doesn’t come with an official gift receipt, the gift receipt is implied.This can be hard to accept. After all, when you lose someone you care about, it’s natural to want to help preserve their legacy. People often view their inheritance as their loved one’s legacy.But what I try to help my clients understand is that the inheritance itself isn’t the legacy. What you are able to do with the inheritance, for yourself and your family, that’s the legacy.It may take time, but it’s almost certainly what your loved one would want.

Stocks, Control & Patience

I've been thinking a lot recently about how much farmers and investors have in common. Both are in the unenviable position of having to depend on something they can't control.I grew up on a farm in Illinois. When I was a kid, my cousins, sisters and I were routinely given the glamorous task of clearing rocks out of the fields. It was pretty simple work: Find a rock as big as you can carry, put it in the bucket of the tractor, repeat.Here's a picture of the family farm, in case you were wondering how big these fields were:Growing up in a farming family, you get used to these kinds of “character building” chores.You also develop a healthy appreciation for the types of circumstances you can and can’t control. For all the decisions farmers make, all the work they do, ultimately they’re at the mercy of the one thing no one can control: The weather.The weather is a constant source of conversation (and aggravation) in farming families. Sometimes it rains too much. Sometimes it rains too little. It almost never rains just the right amount. And of course, if the weather doesn’t cooperate, the whole year’s crops are at risk.With so much riding on something that can’t be controlled, farmers try to focus on tasks they can control. Which crops to plant, which fertilizers to use… making sure the fields aren’t littered with rocks that will ruin their expensive machinery.These days I’m 1100 miles away from the farm, but I think about this idea constantly in my work advising people on their investments -- the anxiety of being dependent on something you can’t control. The way I see it:We have to take what the market gives us.I use this phrase with my clients and my students all the time.Once you’re in the stock market, you have to give up any illusion of control. The short-term is wildly unpredictable, with a wide range of outcomes over a 12-month period. Sometimes it’s unpredictable in your favor, sometimes not.Investing in stocks is about having the potential for higher rates of return over time, but you cannot control when those gains materialize. Sometimes you have to wait a long time.With the markets contributing so much uncertainty, it’s crucial to focus on the very important things you can control. Like your:• Household budget• Taxes• Career choices• Savings rate• Debt repayment schedule• Risk toleranceAnd maybe most importantly, you can work on controlling your emotions by accepting that volatility is an unavoidable part of the stock market. Focusing on the simple jobs you’re able to control can make the rest of it a little easier.