One Tuesday morning in July of 2008, one of my favorite clients (let's call him John) sat in our office and asked me a question that I'll never forget. "Why didn't you reduce my exposure to equities back in May before the market fell so much?" At the time of our conversation, the S&P 500 was trading at 1215. It had fallen about 14% from the levels of May that John referenced. Unknown to John or Benton at the time, following our conversation that Tuesday morning, the market would proceed to fall another 44% before bottoming in March of 2009.
The conversation continued:
Benton: Well John, back in May we didn't know the market was going to fall. We certainly would have reduced exposure to equities had we known. In fact, had we known, we would have gotten completely out of stocks to avoid the loss.
John: It seems like you would have realized that this was not a good time to be in the market. Look at all of these articles that have been written about sub-prime mortgages and the fact that the banks and other lenders are going to take some losses.
Benton: You are right. There has been a lot of news about sub-prime mortgages. Like you, we've been following these stories. The market is off about 14% since May and since its high of last October, it's off about 22%. Presumably it has dropped as a result of the sub-prime situation. We don't know if it has further to fall or if the worst is behind us.
John: Well, I just think we should have been able to see some of this coming and should have been able to position the portfolio so we wouldn't be down as much.
Benton: I know how you feel. With hindsight it looks obvious that we should have made moves to avoid this but history has demonstrated that it is very difficult to time the market and it is not something we try to do at Bragg. But John, this is your money and if you want us to change your allocation, you know we can do that and we can do it today with ease. Just tell us and it will be done.
John: No, no. Not now. We'd be crazy to sell at these levels. The damage is done now. We'd probably be better off buying stocks at these levels rather than selling stocks. Don't make any changes.
In case you missed it above, over the eight-month period that followed this conversation with John, the market fell another 44%. Obviously we would have done well to sell everything that Tuesday morning. We could have avoided the painful losses the future held. And if we'd timed it right, we could have sat in cash until March 9, 2009 and bought back in at the lows just before the market turned up. Hindsight makes it obvious.
The point of this article is simple. It's always Tuesday morning. It simply is. It's Tuesday morning as I type this. It's Tuesday morning as you read this…whenever you read it. And it forever will be Tuesday morning. We simply can't see the future. No one can. There are a host of reasons why the market may fall dramatically starting tomorrow: weakness in Europe, Japan and emerging markets, Trump, debt, nuclear war, Middle East instability, oil, central bank policies, inflation, deflation, super-virus, interest rates, natural disaster, terrorism, valuations and the list goes on. The long list of reasons the market will rise includes low inflation, low interest rates, Trump, human ingenuity, growing global economy, corporate earnings rebound, tax cuts, reduced regulation, health and science innovation, technological acceleration and more. And of course there are the reasons it may rise/fall that we've never considered. On Tuesday morning two months from now, we may find that the market is down 10% from the level of today. And you may wonder if you should get out before it falls further or if you should buy on the dip before it goes back up. And you should wonder. Who knows? No one. On that Tuesday morning, we won't know if it's down 10% on its way to being down 35% or if it's down 10% before turning back up and setting an all-time new record high.
The November 2016 Presidential election provided perhaps the best case for "It's Always Tuesday Morning." On Tuesday morning, November 8, 2016, the polling experts told us Clinton was going to win. The investment and economic experts told us the market would go down if Trump won. When it became clear that Trump would win, the Asian markets and the traders of US market index futures told us the market was going down dramatically when it opened. None of those predictions worked out too well. It was definitely another Tuesday morning. I'm glad we didn't mortgage the farm based on the predictions of the experts. Aren't you?
Whether it's Tuesday, two months from now or Tuesday, two years from now, there will be no shortage of experts telling you what the future holds. We think it makes sense to ignore their guesses. We think you should own a portfolio that is appropriate for your age and stage in life. Own a portfolio that offers the liquidity you may need and one that reflects your need for return. Please let us know if you would like to discuss this. We have plenty of time on the calendar next Tuesday morning.