Legacy Research Group

On Monday, the Dow tumbled 725 points.

It was the biggest one-day drop since October.

There was so much wailing and gnashing of teeth about it in the mainstream press, you may have been tempted to panic-sell some of your stocks.

But that would have been a mistake…

As Weekly Pulse host Tom Beal and I discuss this week, a drop like this is par for the course… especially during the summer.

And be sure to stick around to the end. I share two simple risk-management tips that will help you sleep easy as stocks gyrate.

It’s all in your Weekly Pulse video update at the top of the page.

Regards,

Chris Lowe
Editor, The Daily Cut and Legacy Inner Circle

Transcript

Tom Beal: Volatility happens in the stock market. Are there trends? Is there data that shows where there are times when it is going to be more volatile and times of big returns, times of not-so-large returns?

That’s what we’re going to be talking about today. My name is Tom Beal, the host of The Weekly Pulse, where we break down and bring to you the biggest wealth-growth topic of the week.

I’m here today with the editor of Legacy Inner Circle, Chris Lowe. Chris, how do we kick off today’s conversation?

Chris Lowe: Tom, on Monday, you may have seen the news that the Dow had a big tumble. It fell 725 points. That was the biggest one-day tumble since last October.

The S&P 500 and the tech-heavy NASDAQ index both also had a pretty big down day. That was their biggest down day since May.

You see a lot of folks in the mainstream press running around with their hair on fire when this kind of thing happens. And that can cause people to panic.

I don’t want that to happen. So today, in this video, I thought we’d do three things.

First, we’ll put Monday’s drop in the context of history, just to have a better idea of how it stacks up to normal stock market history.

Second, I’ll show you why in the summer months, this kind of volatility is actually quite normal.

And then, finally, we’ll look at some easy risk-management tips. Things we can do to protect our downside as investors, and also, just to sleep easier when we see this type of stuff in the mainstream media.

Prior to touching base with you, Chris, and the experts here at Legacy Research, my financial literacy wasn’t the greatest. I would get fearful when things like this happened. In the past, I would sell, instead of doing what we’re taught here.

I now see this as an opportunity to get some great gains and, you know, buy when people are freaking out.

I now have a new perspective on this. So I’m excited to hear what we have to discuss today. It’s important for me and I know the Weekly Pulse viewers.

Chris: Yeah, Tom, you’re not alone in freaking out when these things happen. It’s really normal. None of us like to see red ink in our portfolios. It causes fight or flight. We get scared, and we do stupid things.

That’s why I think this video is important. Pullbacks like these – that 725-point fall was about 2% – that’s a totally normal pullback for stocks.

If you’re not able to take a 2% fall… if you’re going to freak out about that… you really shouldn’t be in the stock market. You’re probably better off having your money in a CD, in the bank, in bonds, or something like that. It really is par for the course in the stock market to have these kinds of pullbacks.

Teeka Tiwari says about the crypto market that volatility is the price of admission you pay to have the potential to make life-changing gains. And it’s a similar thing for stocks, Tom. Stock market volatility is just a normal thing.

On average, we get a 5% pullback in stocks about three times per year. So you should expect at least three 5% pullbacks. Monday was a 2% pullback. It was kind of like a nothing burger, really.

We had the last 5% pullback last September. I’d actually expect there to be a 5% pullback.

And my advice would be the same. Ignore it. It’s nothing to get agitated about. You certainly shouldn’t be checking your portfolio or tuning into the mainstream news or contemplating selling stocks.

Unless something changes about the actual stocks that you own, there’s no need to do anything. So that’s number one.

Number two: Volatility picks up during the summer. This is something I picked up from Jason Bodner at our Outlier Investor advisory. Jason used to work on Wall Street. He put together trades of $1 billion and up for some of the world’s richest investors. He knows the stock market inside out.

And he’s a data nerd. He loves looking at stock market history and figuring out what the data says, rather than what your gut or your emotions say.

He looked at the returns for the S&P 500 during July and August. And he compared that with the returns from September to December. When you look at the September to December period, the S&P 500 had a negative return only 12% of the time. 88% of the time, it was positive in those fall and winter months.

But when you look at July and August for the S&P 500, it had a negative return 40% of the time – so a positive return only 60% of the time.

It’s almost four times more likely that during the summer, you’re going to have some bad returns in the stock market, on a relative basis.

You can also look at the average return for those two periods.

If you look at September through December, the average return was 5%. If you look at July and August, the average return was 0.4% – a big difference.

Jason worked on Wall Street, as I said, and his point was very simple. Like everyone else, traders go on holiday in July and August. Their mind goes off their work. They head out to the coast.

They tend to de-risk their positions when they’re doing that. They don’t want to go on vacation with big positions on.

So you tend to have this churn in the summer months.

Tom, does that make sense to you?

Tom: Yes. I mean, like you said, the data… It’s funny. I smiled when you said Jason’s a data nerd. That’s who you want on your team – the people who are looking at the data.

And you just brought historical data to the forefront to share it. Like, this is normal. And regardless of what industry you may be in, it’s a seasonal situation.

The data you just shared reminded me of businesses I’ve been in, where there were seasons of massive growth and then kind of stagnant growth. So it’s totally making sense. Thank you.

Chris: No worries. And Tom, I promised at the top of this video to pass on some very simple risk-management tips.

Risk management just means protecting your downside. Every professional investor does this. They think as much about the downside risk as the upside potential.

You do not want to be the type of investor that only thinks about your upside. You don’t want to be the type of investor that’s 100% invested, say, in crypto or the stock market, without ever thinking about things going wrong.

The number one thing for everyone watching this video is to make sure that they – and I really mean it; you shouldn’t be in the stock market, or in any type of investment market, if you’re not doing this – are diversified.

Never be 100% in stocks. Spread your wealth, spread your portfolio out over stocks, real estate, cash, maybe some cryptos and other speculations, bonds even, if that’s your thing, precious metals, gold.

The reason you do that is because then, no single event like a stock market crash is going to radically affect your wealth.

In a stock market crash, you’d still have your real estate. That’ll do OK. Your cash will do OK. Your gold will probably do very well.

And then, in a growth market, your crypto and your stocks will do well. You have a balance across your portfolio.

And the final thing, Tom, is have a long-term time horizon.

You know, looking at day-to-day moves in the stock market is a mug’s game. If you’re a short-term trader, that’s fine. But most folks aren’t. They’re long-term investors.

You need to look beyond these types of ups and downs. As we mentioned, they’re perfectly normal. It’s the stock market being the stock market.

I looked back, Tom, to what would have happened to your wealth if you just bunged it in the S&P 500 at the March 2009 low, which came after the last big crash, the global financial crisis in 2008. The S&P 500 is up more than 500% since then. That’s a huge gain.

All you had to do is sit back and do nothing. But to get those returns, you had to ignore the 5% down days, the 10% corrections, the 20% corrections. You had to be able to stomach the volatility, or you just did not earn that 500+% return.

So those are the last two things, Tom. Have a sensible, diversified portfolio. Divide your wealth up into different buckets – cryptos, cash, stocks, bonds, real estate, etc. And then, have a long-term time horizon.

If you do those two things, you’re not going to be worried about the kind of action we saw on Monday. You’re not going to be tuning in to CNBC and thinking, “Should I sell some of my positions?” right at the wrong time.

Tom: 100%. And that’s why I’m so thankful to have your guidance and the experts’ guidance even deeper than this inside Legacy Inner Circle. Thanks again for putting me at ease and hopefully, putting the rest of the Weekly Pulse viewers at ease.

Chris: Thanks, Tom.

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