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Weekend Reading: Lack Of Perspective

Written by Lance Roberts | Mar 24, 2017

In this past weekend’s missive I wrote:

“Speaking of low volatility, the market has now gone 108-trading days without a drop of 1% for both the Dow and the S&P 500. This is the longest stretch since September of 1993 for the Dow and December of 1995 for the S&P 500.

The issue becomes, of course, which way the market breaks when volatility returns to the market. Over the course of the last three years, in particular, those breaks have been to the downside as shown below.”

“Given the particularly extreme overbought condition that currently exists, the strongest odds suggest the next pickup in volatility will be in the form of a corrective action to reverse some of that condition.”

Of course, on Tuesday afternoon that long streak of complacency came to an end as all major U.S. markets tumbled by more than 1% by the close.

While such an event has been expected, it still seemed to catch investors by surprise. Of course, given such a long period of upwardly trending prices with exceptionally low volatility, investors had been lulled into very high levels of complacency. The media had also fallen into the trap, as noted by the graphic above, suggesting the one-day correction had been a major mean reverting event.

It wasn’t.

As shown in the chart above, updated through Thursday, all indicators remain extremely overbought. While the markets may indeed rally into Friday’s close, it is quite likely the correction that began on Tuesday is not complete as of yet.

Furthermore, after such a long period of low volatility, the sharp decline in asset prices is one day FELT much worse than it actually was. 

This is the important, and often missed point about “passive indexing.”

While a 10% decline in the market certainly does SOUND that bad, with a 2000 point loss on the Dow, or a 230 point loss on the S&P 500, FEELS entirely different. This is where investors start making emotionally bad investment decisions where “passive investing” ultimately becomes “panic selling.”

It is the “lack of perspective” by investors that eventually lead them into the myriad of investment mistakes which destroys investment capital. Think about it this way. If a 1% decline causes this much angst in the market, what happens when you multiply that by 10?

While it is often said it is only “time IN the market” that matters, investors must remember “time” is the one commodity we can not replace. 

Just some things I am thinking about this weekend as I catch up on my reading.


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Lance Roberts is a Chief Portfolio Strategist/Economist for RIA Advisors. He is also the host of “The Lance Roberts Podcast” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report“. Follow Lance on Facebook, Twitter, Linked-In and YouTube

2017/03/24
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