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It's crashing! What now?

Between pandemics, wars, inflation, and interest rate hikes, the world has been through quite a lot over the past couple of years. All things considered, the stock market has performed quite well over this tumultuous period, with the S&P up about 55% since March of 2020 (time of writing: May 13, 2022). However, it appears that these factors have finally caught up to the market, with a recent plunge taking the S&P down over 15% YTD. What’s worse, experts believe that the markets have not yet reached the bottom; it is quite likely that the uncertainty in Ukraine as well as continued interest rate hikes by the Fed will trigger an even deeper selloff. This possibility can be confirmed by Wall Street’s “fear gauge”, officially titled the CBOE Volatility Index (ticker: VIX). Although reaching 35 points on May 10, 2022 (nearly a 52-week high), the VIX still seems rather subdued considering the external pressures on the market as of late. According to Robert Schein, CIO of Blanke Schein Wealth Management, this signals that “investors believe an even deeper selloff may occur over the coming months.” Mr. Schein thinks that if the sentiment among investors was that the “bottom was near”, the VIX would be significantly higher (for context the VIX reached 79 points in October 2008)

So what does that mean for investors? Most importantly, do not panic! We have seen large market crashes occur throughout history, namely the Great Crash of 1929 (Dow Jones Industrial Average dropped by 25% over four days), the Black Monday Crash of 1987 (DJIA fell by 23% in one day), the ’08 Financial Crisis, and most recently the crash in March of 2020 as the Coronavirus began to spread world-wide (DJIA plummeted 13% on March 16 and the S&P 500 declined by 34% between Feb. 19 and Mar. 23). As of May 13, 2022 the Dow and S&P are down about 12% and 16% year to date, respectively. While it is very easy to be prisoners of the moment and hesitate to put any more of your hard-earned dollars into the market (due to the thinking that the market may never come back and you will continue to lose money), I strongly urge you not to fall into this trap.

First of all, let’s address the worry that the market may never rebound, which in my opinion is not only pessimistic but unrealistic and asinine. While I am certainly not claiming to be able to see into the future, I’m a strong believer in the saying, “The best predictor of future behaviour is past behaviour.” In other words, throughout history the market has proven its ability to consistently rebound after every crash and correction, so there is no reason to believe otherwise this time around. However, many people, in the moment, lose this perspective and panic; their emotions take over when they experience volatility and see big red numbers and oftentimes they sell and get out of the markets altogether. Unless you’re someone entering retirement (who doesn’t have any sort of an emergency fund) and can’t afford to wait for the market to come back, you shouldn’t even remotely consider selling your positions.

Although it can be sad to see people making these costly, rash decisions, an experienced investor rejoices when they see panic and fear set in because with panic comes opportunity. You certainly can’t blame them for rejoicing; the highest 10% of the VIX’s weekly closes (VIX above 28.6 points) since its inception in 1993 have been followed by annual S&P 500 returns that are significantly higher than those periods with less volatility (and a lower VIX). See Exhibits A and B

Exhibit A

Exhibit B

Unfortunately we can’t time the market, making it impossible to know when it’ll hit the bottom; however, I would advise you to take advantage of this wonderful opportunity that this correction has provided by gradually funnelling cash into the markets (dollar cost averaging). As CEO of Compound Capital Advisors Charlie Bilello says, “if you’re a long-term investor you want to be a buyer of opportunity, not a seller.” It might take a year or two for the market to return to peak 2021 levels (depending on war, pandemic, and inflation/interest rate hikes), it may takes less, but all I can tell you is that history tells us that it will.

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