Focus on Lessons Learned versus the Correction

“When the horse dies, dismount.” This one of my favorite quotes from Theodore Roosevelt. The analogy to owning stocks for me is very applicable. I have changed it to when the trend dies, get out. It always amuses me how many emails I get from Wall Street companies like mutual fund, ETF, and variable annuity companies explaining why you need to stay the course and hold through the downturns in the market. Why is it when the markets do something irrational like fall ten percent¬†in four trading days that everyone wants me to stay the course, hold onto my investments? We all know that Wall Street makes money on money staying invested not in cash. To make their point they attach the¬†long term charts and statistics showing the performance history and what a mistake it would be to sell now. The challenge comes in thinking and investing based on a disciplined strategy such that their opinions don’t influence us or apply to what we do to manage money.

The chart below is the daily chart of the S&P 500 index since January 1, 2015 to current.


It is simple enough to see from a short term perspective that every trendline within this range has been broken on the downside. That means I¬†should have sold¬†my holdings that are¬†short term in duration. If you are still holding them you are stuck with the dilemma of what to do now. That is a tough call as you took the strategy to a different objective. Now emotions will interfere with the decision process. This is where the trouble begins and it usually doesn’t end well. The weekly chart shows a similar story with the uptrend line broken and the downside is now in play on a mid to long term trendline. Again the trend is the key indicator for the markets based on the time horizon and risk objective you deploy in your strategy.¬†The discipline used to invest your money will be the ultimate decision factor for positive results.

Too often we make managing money more difficult than it should be. It has nagged me for years why this is true? I can only come up with one simple conclusion… reversal regrets. When we use trend analysis as a strategy we have to define the exit points based on the trend and our discipline. In other words the trend approach has¬†fit our personality and habits. In the event¬†of a move below the trendline, hits our stops or exit points, then¬†reverses and moves¬†higher creates what I call reversal regret.

Why? I have boiled it down to rational reasons; first, no reentry plans. If our stop is hit and then reverses only to rally and move higher it creates sellers remorse. If we hit the stop and then looked to determine if it reverses what makes for a logical reentry point, we would have a plan in place to own the position again. Thus, dealing with the sellers remorse with a proactive approach to managing our money. Second, it creates a disbelief in the downside wiping out ten percent or more of value quickly. In other words we get desensitized to the fear of big losses. Managing positions and portfolios is a science of habits. Learning good habits is like Boolean logic, IF ____ happens, then _____ action is taken. If SPY moves below the trendline I will sell my position. If the break is false, I will look for the logical reentry point for SPY. Simply put, you are always looking at the worst case and preparing for it, but you are also stating that if the selling is false or overdone there is a defined point to buy the position back. This logical approach sounds so easy to implement, but it is actually one that is extremely difficult to implement consistently. In the heat of battle emotions will trump logic ninety-nine percent of the time. Thus, we have to practice good habits.

If we practice good habits in managing our money we will “Stay the Course” based on our plans, habits, strategy and discipline and in the process avoid the brain damage of emotional trading. Imagine asking yourself questions about your positions or portfolio when the market is down ten percent? Emotions rule at this¬†points in time… not logic. What are the odds we make good decisions? Logic rules when all is well. Practice setting stops if you can’t pull the trigger to sell. Use¬†buy-stops if you can’t hit the enter key to buy-back positions when the time is appropriate following a false exit point. Build your habits through repetition and asking yourself good questions after each decision is made… what worked and what did not. Learn, adjust and refine your strategy accordingly going forward.

I don’t like markets that correct ten percent in only a few days. They create unnecessary angst about managing money for me and others. But, if I use good money management habits I will achieve my objectives with clarity and peace of mind. I don’t learn from rationalizing actions… I learn by understanding the action taken based on the market¬†environment during each decision and the results. Taking the time to review, taking notes, understanding and then adjusting according to the analysis will make¬†you a better investor and money manager. The last week has been an extreme teacher on market corrections. Take the time to learn more. The markets trading range has been an opportunity to learn as well over the last five months. Focus on the take-away for managing money versus the mistakes that may have been made. Learning in this market environment is priceless for future benefit. Stay disciplined this rodeo is not over yet.