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August 20, 2020 | Reality Check: Making Back Losses is Not The Same as Making Gains

Danielle Park

Portfolio Manager and President of Venable Park Investment Counsel ( Ms Park is a financial analyst, attorney, finance author and regular guest on North American media. She is also the author of the best-selling myth-busting book "Juggling Dynamite: An insider's wisdom on money management, markets and wealth that lasts," and a popular daily financial blog:

Investment sales folks and Perma bulls who lost heavily in the first quarter are celebrating the rapid bounce back in market prices since March.  Many cashed out with losses near the lows but have panicked and bought back higher in recent weeks.  Others who held through the heart-pounding drop are relieved at the rebound, but not yet whole, and understandably nervous about what happens next.  Prospects for their progress from here aren’t good.  See Stock market at record highs is forcing everyone to become a believer:

“Fund managers who went to cash when the pandemic broke out have been forced back in to stocks, pushing measures of positioning toward historical highs. Wall Street forecasters, some of whom threw up their hands in surrender four months ago, are pushing up targets each day.

..While testament to the career pressure missing a $12 trillion rally creates, the unanimity has become one of the biggest risk factors in markets right now, with positions getting crowded as everyone is forced to buy. A custom gauge of sentiment compiled by Citigroup Inc. showed “euphoria” just hit the highest level since the dot-com era.

…So much faith is put in the Federal Reserve that investors are willing to pay up for earnings that’s estimated to drop 20% this year. At 26 times forecast profits, the S&P 500 was traded at the most expensive level in two decades.”

Before getting sucked into the frenzy it is vital to understand that buying high and selling lower is the most common pattern for would-be investors and the behaviour magnifies capital risk for everyone trying to own assets alongside them.

As I have explained many times, investment theory sells the promise of positive compound returns over time, but in reality, the long term smoothed out averages widely quoted presume zero withdrawals or fees and that every dollar of income is perpetually reinvested into more units of securities upon receipt.  This is not real life.

As I pointed out in Hold and hope at extreme valuations suggests compound losses:

Even if we suspend reality and fantasize that an investor–does not pay any fees or taxes, nor make withdrawals at any time, nor amass the bulk of their life saving late in life, nor add lump sums to expensive securities near cycle highs nor sell after cyclical drops–even if we assume all of this–and that a person added the same amount of savings to buy stocks every year, never more never less, and automatically reinvested every single dividend 100% back into more shares–that theoretical person still has spent 10+ years trying to grow their capital back to even after each manic secular peak in equity and corporate debt valuations since 1920.

Spending 10-15 years to try and grow back losses with no net gains is not a reasonable or efficient plan for real-life people with finite time horizons.  In the meantime, emotional, family and physical lives are negatively impacted, and plans thwarted.

Think about it:  if price-indiscriminate asset buying and speculation encouraged by risk-sellers and central bank largesse actually worked in creating wealth for savers, then the last 20 epic years would have produced high financial stability and net equity for households, businesses and the economy, not our present fragile opposite.

Concentrating dilligently on an area of expertise to earn our money, saving, and controlling our spending and capital risk, while ignoring the FOMO (fear of missing out) pitch of investment sales offers the highest probability of achieving our financial goals.  Yes, we can.

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August 20th, 2020

Posted In: Juggling Dynamite

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