Minsk Market – A wealth of common sense

As of the end of May, the S&P 500 has experienced 24 new all-time highs this year alone.

Volatility has been relatively low for some time now. We haven’t had a day down 2% in the S&P 500 in more than 300 trading days:

That’s fast approaching the longest streak without a bad day in 10 years.

The S&P 500 is up about 11% for the year on a total return basis. That’s pretty good considering it was more than 26% in 2023.

If you stayed the course by continuing to plow money into your 401k, IRA, or brokerage accounts during the 2022 bear market, the market value of your portfolio has never been higher.

Sure, you have to deal with some FOMO and the possibility of greed forcing you to make bad decisions, but these are good times for investors.

Markets are up. Volatility is low. You can earn 5% on your safe assets in treasury bonds or money markets. There isn’t much to complain about when it comes to the financial markets.

I’m not a doomsayer or someone who tries to predict what the markets will do (especially in the short term), but you have to enjoy the good times while they’re here. They won’t last forever. They never do.

In the early 1990s, economist Hyman Minsky published a research paper called Hypothesis of financial instability. Minsky wrote: “During periods of prolonged prosperity, the economy passes from financial relations that create a stable system to financial relations that create an unstable system.”

Basically, stability ultimately leads to volatility as investors and businesses throw caution to the wind and take more risk in good times, which inevitably leads to bad times.

Going down even further, markets are cyclical.

During downturns, expectations continue to be revised lower and lower amid bad news. Markets fall and investors become overly pessimistic. The point is, you don’t even need good news to turn the tide, just less bad news. It’s not good or bad that matters in the short term, but better or worse.

The opposite happens during uptrends. Expectations continue to rise higher and higher as markets rise and investors become overly optimistic. You don’t necessarily need bad news for the good times to end, just less good news.

The key as an investor is to avoid letting your emotions match those of the herd.

I like to think of it in terms of lower expectations.

If you lower your return expectations, you’re more likely to stick to your plan when things go south or greed runs rampant.

Having lower expectations also frees you from having to constantly predict what will happen next.

If you can’t predict what will happen next, what can you do to prepare?

These two questions can help balance the twin emotions of fear and greed

Would I be comfortable with my current allocation in the event of a major market selloff?

Would I be comfortable with my current allocation in the event of a continuation of the bull market?

I do not have the ability to predict the length of bull markets or the timing of bear markets.

But I know you can’t keep your high watermark on stocks that last forever. Every once in a while, there will be a violent correction that burns some of your capital base in the short term, even if things work out in the long term.

The time to prepare for that inevitable burnout is when things are going well, not during the current correction.

Further reading:
A necessary evil in the stock market