How to decide the investing scale and timeframe that works best for your temperament.
Topics covered include:
- How stocks perform in the days and weeks following catastrophic events
- What are some potential financial impacts of Russia’s invasion into Ukraine
- How complex systems operate at different scales and timeframes
- What are examples of different scales and timeframes for investing
- How tactical asset allocation strategies work
- Why schema and rules of thumb develop and how do they get passed on
- How to decide on which investment approach works best for you
Show Notes
Nikkei 225 Index – 67 Year Historical Chart—Macrotrends
Panarchy: Understanding Transformations in Human and Natural Systems by Lance H. Gunderson (Editor)
Trying Not to Try: The Art and Science of Spontaneity by Edward Slingerland
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Transcript
Welcome to Money For the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I’m your host, David Stein. Today is episode 376. It’s titled “What Investment Style Fits Your Personality?”
Stock Market Returns Following Catastrophic Events
Right after the 9/11 terrorist bombings, a few weeks later, I was in a client meeting; our firm had prepared some data that showed how the stock market performed after similar catastrophic events, be it wars, assassinations, bombings, other terrorist attacks. I’ll share some of that data here momentarily.
But after sharing that data with that client—it would have been a board member of a university endowment—he called me out on it. “You don’t know. There’s no way you can know that.” After 9/11, the first day of the stock market, when it reopened, it fell 7%. It was down 14% in five days, and after ten days, it was still down around 8%. Twenty-two days later, it was down 2.3% still, and it was around that time that I had this client meeting.
Sixty-three days later, the market was up 1.7%, and 126 market days later, the stock market as measured by the Dow Jones Industrial Average, a measure of US stocks, had gained 10%. The reality is the stock market can sell-off in the short term.
But after there’s some type of invasion, like we’re seeing with Russia into Ukraine, as we speak, other terrorist bombings, other attacks or wars, the market, on average, one day later—and this is going back to the early 1900s, numerous events, as compiled by Ned Davis research—is down about 1% to 2% one day, five days, ten days later.
Even after 22 days, the market is down about 1% on average. But as we go out 60 days, 126 market days, the market rebounds and on average has been up 3%.
Now, the takeaway from this is not that the stock market always goes up. It doesn’t. It will gyrate.
But we don’t necessarily want to freak out whenever there’s some type of invasion, because it depends, and the probabilities suggest that eventually, the market rebounds. Now it doesn’t always.
We can look at Japan; the Nikkei 225 today is selling at the same level it was in April 1988. It’s 30% below its all-time high reached in December 1989. That’s the price level. With dividends, the market would have done better, with those dividends being reinvested. But just the price level for the Nikkei, 30% below its all-time high, at the same level it was in 1988. That’s why it’s not always stocks for the long run, and we have to put it into context and understand the return drivers.
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