It’s caused by [reasons]
That’s why the markets are down.
In truth it’s feelings

Several years ago, while working in the visual effects industry in Los Angeles, a well-traveled friend told me about an old Chinese curse: “may you live in interesting times.” It turns out that no one actually knows where this quote came from. But the idea of “interesting times” being a curse is rarely as evident as it is now.

Market losses, geopolitical conflicts involving nuclear powers, baby formula shortages, pandemics, inflation, natural disasters, and on and on. Interesting times.

But what do all of these events have to do with capital markets? We can look at indicators in the US economy to gauge how healthy it is. Here are a few of them (these all reference the “Mitch On The Markets” weekly market commentary from Mitch Zacks of Zacks Investment Management):

Jobs: The number of available jobs in the United States is at a record high, with almost two jobs for every unemployed worker.

Earnings: 80% of S&P 500 companies reporting Q1 earnings beat their earnings-per-share expectations. 72% of these S&P 500 companies beat expectations for revenue. To quote Mitch Zacks directly: “Over the last 12 months, S&P 500 companies have reported a collective net profit margin of 12.18%, representing the highest after-tax corporate profits relative to GDP that have ever been recorded (records date back to the 1940s). This is not the stuff of recessions and bear markets.”

So what on earth is happening? Why is my stocks app a blood bath every day?

Evidently what is afflicting the market – and likely your portfolio – right now is not something that is fundamentally broken in the United States’ economy, or capitalism, or Western Civilization, or the world. What we are seeing is the price of acting on pessimism.

People are besieged by bad news at nearly every turn. This is not by accident. News outlets are businesses and need revenue. Unfortunately for all of us, the easiest way for the news to get people’s attention is through showing bad news.

Imagine for a moment that you are a hunter-gatherer, stalking through a prehistoric landscape in search of plants to forage and animals to hunt. Suddenly, a bush nearby shakes violently.

Where are you going to focus your attention? On the stable ground beneath your feet? On the blue sky above? On the pleasant, cool breeze? On the pretty songs of birds in the area? Or on the bush that might be hiding a lion?

Our brains figured out a long time ago that the cost of ignoring threats is far greater than the cost of ignoring non-threats. Naturally, we focus all of our attention on the bad stuff and ignore the good stuff.

Unfortunately, what worked in the wilderness 12,000 years ago is less useful in the modern wilderness of capital markets, Moore’s Law, global trade, and a seemingly endless parade of things demanding that we worry about them.

It is perfectly ok to be upset when markets are misbehaving. It is important only to avoid acting immediately on those feelings. Wait until you’ve given yourself a chance to take stock of the situation.

How are the defensive parts of your portfolio doing? If you’ve established defensive positions, you likely don’t need to touch your equity holdings while they are declining in price. What about income? Is your income going to be impacted by a market correction? If not, you have time to wait for a recovery.

If you look at market history, it’s amazing how big an impact just a few days of positive performance can have. If you look at markets from January 1, 2002, until December 31, 2021, the S&P averaged 9.5% per year. However, if you removed just the 40 best days of that 20 year period, the S&P would be down by 1.5%.

Looking at actual dollars shows what a big deal this really is.

If you invested $10,000 in an S&P 500 index fund on 1/1/2002, and stayed invested every day, you would have $61,379.63 by 12/31/2021.

Keep in mind this stretch of years includes SARS 03, the wars in the Middle East, The Great Recession, the Ebola pandemic of 2013-2016, the Boston Marathon Bombing, the NYC Blackout, Katrina, Fukushima, and innumerable catastrophes that dominated headlines before being replaced by something more catastrophic.

But what if you fled the markets during the bad times and missed those 40 good days? Your $10,000, invested on 1/1/2002, would be worth $7,389.68. Instead of being up by $51,379.63, you would be down $2,610.42.

This is not the price of pessimistic thinking. Asking someone to avoid or somehow ignore emotion is like asking them to see in black in white. People have emotions. It’s part of being human. It is the price of acting on those pessimistic thoughts.

Fortunately, part of being human is also the ability to plan for the future. Remember our hunter-gatherer confronting that spooky, rustling bush? What if that hunter-gatherer knew that lions were out there, and liked to hide in bushes? That person would think ahead, have weapons, have friends nearby, and have a plan of attack (or defense) for dealing with rustling bushes.

Emotions are not the problem. The problem is failing to plan for “interesting times,” and the emotions they will produce.