Swedroe: Sky Isn’t Falling

January 04, 2019

From an emotional perspective, steep market declines are difficult to deal with, as we tend to feel the pain of a loss twice as much as we feel the joy from an equal-sized gain (the ratio increases with the size of the investment).

Research also has found that losses even lead to physical responses, such as pupil dilation and increased heart rate. This has been found to be true even for people who weren’t naturally averse to losses.

The problem is that emotional responses can lead us to “catastrophize”—not only focusing solely on the negative news, but assuming the worst will occur. For investors feeling like they have been punched in the stomach, it seems like there’s plenty to worry about (which is almost always the case).

Issues include the risk of a full-scale trade war; the government shutdown; at 27.5, the Shiller CAPE 10 is still well above its historical average; the yield curve is inverted (the yields on three-year Treasury notes, at 2.47%, and five-year Treasuries, at 2.49%, are below the two-year Treasury bill’s yield of 2.50%); the Federal Reserve continues its great experiment of unwinding its balance sheet, which had peaked at $4.5 trillion and ended 2018 at $4 trillion; massive budget deficits continue; and many geopolitical risks (including Brexit, the Italian budget crisis, Russian aggression, and the death of journalist Jamal Khashoggi complicating relations with Saudi Arabia) exist. Unfortunately, catastrophizing often leads to panicked selling and the abandonment of even well-thought-out plans.

Not All Doom & Gloom

To help you keep a balanced perspective, I’ve compiled a list of some economic positives of which you should also be aware. Focusing on them might just keep you from what I refer to as committing “portfolio suicide”—that is, panicked selling, which is difficult to recover from because there is never a green light letting you know that it is safe to get back into the market.

Thus, it’s my experience that, once you sell, unless you are extremely lucky, you’re virtually doomed to fail. Here’s a dozen positives to keep in mind:

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