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The Cost of Anticipating Corrections

We hope you had an enjoyable summer. Since our last update in late July, the markets have continued to grind higher despite daily information around COVID and its impact on the economy. In fact, the S&P 500 reached an all-time high this week, led by the FANMAG stocks (Facebook, Apple, Netflix, Microsoft, Amazon, and Google).

As we stated in late March, a disciplined approach to a long-term investment strategy and plan remains a pillar of financial success. This period, although stressful, has rewarded those disciplined investors.

Below are the topics for this weekend’s reading.

The Cost of Anticipating Corrections (Larry Swedroe)

The apparent decoupling of market and economic data, as outlined above, leads to the obvious behavioral choice to wait until the next correction before buying stocks.

Larry Swedroe studies the cost of waiting for corrections. He reviews data from 94 calendar years (or 1,128 months) of US investment returns.

The average monthly returns were 0.94% and average quarterly returns were 2.9%. So, you can surmise the cost of anticipating a correction is 0.94% per month. However, Swedroe then reviewed the cost of missing the best month in each of those 94 years. What he found was the those 94 best months (8.3% of all months) produced 100% of the returns.

No one knows the future. So, if you decide to sit out an wait for a correction (or sell after a correction and wait for a recovery). On average it will cost 0.94% per month, but it could potentially cost much more than that, as stock market returns come in waves.

When the Magic Happens (Morgan Housel)

This is a great historical piece about the major innovations of the 20th century. As Morgan describes, each one of those innovations was borne out of hardship. The most innovative and productive period in the 20th century was the decade of the 1930s. It also happens to have been the most economically trying decade of the century, in which the country was crippled by the Great Depression.

So, in another period of economic hardship, how will history look back on the 2020s? Morgan points to a few innovative themes.

  1. Biotech – We are on track to develop, manufacture, and distribute a vaccine in record time. Previously, the fastest vaccine was developed in 4 years. We may accomplish the COVID vaccine in less than months. What positive side effects will come of this ramp up in discovery, manufacturing, and distribution?

  2. Urban Development – Much of the countries wealth prior to COVID was confined to the major cities (New York, San Francisco, etc.). Even a slight shift in permanent remove work could make rural areas more prosperous. We may already be seeing this, as Housing Starts increased 22% in July.

  3. Education – Student debt was a major issue in the pre-COVID era. How many students will realize that $70,000/yr higher education institutions are just not worth the debt burden, and what innovations will come out of that fundamental shift?

As Morgan states, “creativity and discovery surge when people are forced to find, rather than want, new solutions…it might be one of the only silver linings of 2020.”

We hope everyone has a happy and safe weekend. Please give us a call if you have any questions.


This newsletter contains general information that may not be suitable for everyone. The information contained herein should not be construed as personalized investment advice. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this newsletter will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security.

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