Episode #27- Investing Cycles and The Wall of Worry

Wealth Decisions Podcast Transcript for Episode #27- Investing Cycles and The Wall of Worry

Listen to this episode on Apple Podcasts or Spotify

Welcome to The Wealth Decisions Podcast, where each week I take 15 minutes or less to discuss crucial wealth decisions and mindset hacks to help you live a richer life.

I'm your host, Brian Muller, and I've been in the financial services industry for over 25 years, and I'm also a certified life and health coach.

And I have a passion for helping people make better decisions around their money and their life.

So for the sake of time, let's dive right into it.

In today's episode, I'm going to be talking about market cycles and the wall of worry.

As a financial advisor, I've seen many investors struggle with the ups and downs of the market.

And understanding that the market does move in cycles and how to navigate them is the key to long-term investing success.

In this episode, I'm going to explore the concept of market cycles and the phenomenon known as climbing the wall of worry.

So let's just start by defining what investing or market cycles are.

There are broad patterns of ups and downs in the overall market or in a specific sector or asset class.

Understanding these cycles is crucial because they influence investment performance and can guide your investment decisions.

So let's just talk about the four main phases of a market cycle.

The first phase is the accumulation phase.

This is the phase that occurs usually after a market bottom when savvy investors start to buy, believing, you know, the worst is over.

Prices are still fairly attractive, and the general kind of sentiment in the market is still fairly bearish, meaning that people are not too confident in the market.

This is often the best time to buy, but it's also the hardest psychologically, because you're going to be buying when all the noises out there saying the sky is falling.

The second phase is what's called the markup phase, and in this phase, the market has been rising for a while, and more and more investors start to enter.

The technical indicators start to improve, and the general sentiment in the market becomes a little bit more positive.

Prices typically rise a little quicker, and the fear of missing out, the FOMO starts to set in.

The third phase is the distribution phase, and that's when the market maybe reaches a peak, and inform investors begin to sell, and prices might still push slightly higher, but there's an increase in volatility.

And this phase is hard to identify in real time, but it often becomes clear only in hindsight.

And then the fourth phase is the markdown phase.

This is when the market declines, negative sentiment takes over, the headlines are clouding our minds, and selling starts to accelerate.

And this phase can be rapid and severe, as we've seen in market crashes, or it can be a correction or a prolonged bear market.

And a bear market is when the markets go down for an extended period of time and don't recover quickly like they do in a correction.

One thing to note that these phases aren't always clear cut or easy to identify in real time.

You know, they can vary in length and intensity, and different sectors might be in different phases at the same time.

So now that we understand just a little bit about the basic structure of market cycles, let's just explore the concept of climbing the wall of worry.

The phrase climbing the wall of worry is just a colorful way to describe how bull markets overcome a series of negative factors and negative news and continues to move higher.

It's similar to what we're in right now.

It's called a wall because these worries can seem kind of insurmountable, and yet the market continues to climb.

This concept is crucial for investors to understand because it explains why markets can continue to rise even when there seems to be plenty of reasons for concern.

And some common bricks in the wall of worry might include geopolitical tensions, economic indicators suggesting a slowdown, high valuations of stocks, political uncertainty which we're in right now.

Sometimes even natural disasters are obviously what we saw with the pandemic can be one of those bricks as well.

Also, corporate scandals or bankruptcies like we saw in the Great Recession and the 2008-2009 financial crisis.

The key really is that markets often climb this wall of worry because these concerns sometimes are already priced into the market.

You know, as each worry kind of gets resolved or maybe proves less impactful than feared, it can actually fuel further market gains.

Now we all know that not every worry is overcome.

Sometimes the concerns are justified, you know, and they can lead to market corrections or even prolonged bear markets.

The challenge for investors is just distinguishing between a normal market worry and, you know, genuine threats to a bull market.

So let's just discuss in a little bit how to navigate the wall of worry.

Navigating the wall of worry, it comes down to three things.

It's your awareness, some analysis and emotional discipline.

Number one, you want to stay informed, but don't overreact.

You know, keep abreast of economic indicators and geopolitical events and market news, but avoid making any knee-jerk kind of reactions to every headline.

You know, just remember the market often prices in bad news before it happens.

Number two, you have to distinguish between the noise and maybe a signal.

You know, not all worries are created equal.

You know, learn to differentiate between short-term noise and genuine long-term concerns.

This often requires looking beyond, you know, the headlines and looking at underlying economic and business fundamentals.

There was a research conducted by Charlie Bilio of Compound Capital Advisors in 2022.

What he did is he looked at the Markets in Turmoil report that CNBC put out every time the markets were struggling.

And he went all the way back to May of 2010.

What's interesting over those 12 years is the airing of that segment had a successful track record of success at predicting the direction of the markets over the next year.

But not in the direction that most of us initially would suspect.

According to Bellios analysis, the S&P index has gone on to deliver positive returns in the year following the airing of the Markets in Turmoil report from CNBC each and every time.

And on average, the S&P 500 index gained about 40% in the following year after the airing of the Markets in Turmoil report.

One thing to note from this analysis is the data set in it started in 2010, and there's kind of limited to an environment in which market corrections were generally short lived.

And didn't experience much of a drawdown.

This was after the 2008 and 2009 financial crisis.

But what it did show is that when the news was the worst, when CNBC put out this report, this Markets in Turmoil report, that's when fear was at its height, and generally was the best time to invest.

You know, these reports were just nothing more than noise.

They were designed to gain viewership during a very volatile market environment.

A third strategy for navigating the wall of worry is just to understand market sentiment.

There's tools like the VIX, which is the Volatility Index, put and call ratios.

I tend to look at the ratio of bulls and bears.

And this can help you gauge whether people are fearful or greedy.

You know, extreme pessimism or fear can often be a contrarian indicator and signal a good time to invest, going against the grain.

Number four, you know, look for positive kind of divergences.

You know, even as negative news dominates the headlines, you look for signs that the market or certain sectors are showing some resilience.

This could, you know, indicate that the wall of worry is still going to be climbed.

Number five, maintain a long term perspective.

Remember, always remember that short term volatility is normal.

I talked about that in previous episodes, that we have about four, five percent drops in the market per year and one ten percent drop in the market per year.

You always want to maintain a long term perspective.

Number six, consider dollar cost averaging during periods of heightened volatility.

This just involves investing a set dollar amount so that no matter what's happening in the markets, if the markets are higher, you're buying less shares and when the markets are lower, you're buying more shares.

This can just help you navigate some of this uncertainty and help you take advantage of the volatility in the markets.

And number seven, you want to rebalance on a regular basis.

You might have a time where you have a lot of growth investments that have done really well and now your portfolio is overweighted in growth or overweighted in stocks.

Take that time to rebalance if your portfolio is kind of beyond a threshold.

Say if your portfolio is 80% in stocks and 20% in bonds and now it's 85% in stocks and 15% in bonds.

Reallocate that portfolio back to that 80-20 mix.

You know, navigating a wall of worry successfully often means going against your emotional instincts.

It's natural to feel fearful when negative news comes about, but historically those that have stayed invested during these periods have often been rewarded.

So let's just talk a little bit about some successful long-term investing strategies, regardless of what market cycle we're in.

Number one is you want to develop and stick to a plan.

Create an investment plan that's aligned with your goals and risk tolerance, and stick to it in all different types of periods.

Number two, diversify wisely.

You know, spread your investments across different asset classes, sectors, and geographies.

This is going to help you manage risk and smooth out your returns over time.

Number three, truly understand your risk tolerance.

Be honest with how much volatility you can handle.

And it's better to have a slightly more conservative portfolio that you can stick with during difficult times than an aggressive one that causes you to, you know, panic sell during downturns.

Number four, use market cycles to your advantage.

You know, timing the market is not usually possible.

Very few have consistently done it.

And understanding where we are in the cycle can help you make better decisions.

For example, you know, you might be more cautious about adding risk near the peak of a bull market.

Number five, keep some cash available.

You know, maintain a little bit of cash when the markets are reaching new highs.

This will give you kind of some powder dry, give you some peace of mind, and allows you to take advantage of some of the opportunities that may come up during any market downturns.

Number six, focus on quality.

Avoid the 3X leveraged ETFs and the sector funds and over weighting technology, just because it's doing so well.

focus on high quality investments with strong fundamentals.

And number seven, just try to continually educate yourself.

Markets change and new opportunities and risks will emerge.

just stay curious and keep learning about investing and economic trends, if that's what you're interested in doing and if you're self-managing your own portfolio.

And number eight, as I've always mentioned in previous episodes, consider some professional advice.

If you find it challenging to navigate the markets and market cycles and maintaining discipline, consider working with a financial advisor who can provide you objective guidance and who's been through difficult times before and has helped clients navigate those market cycles.

just always remember successful long-term investing isn't about avoiding all the worry or perfectly timing the market.

It's about having a solid plan, staying disciplined and using market cycles to your advantage rather than being used by them.

So that's it for today's episode, Market Cycles and the Wall of Worry.

Listen to this episode on Apple Podcasts or Spotify


-Brian D. Muller, AAMS® Founder, Wealth Advisor

Momentous Wealth Advisors in a fee-only fiduciary advisory firm

Disclaimer: This material is for informational purposes only and should not be construed as investment advice. Past performance is not indicative of future results. Investors should make investment decisions based on their unique investment objectives and financial situation. While the information is believed to be accurate, it is not guaranteed and is subject to change without notice.

Investors should understand the risks involved in owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates and investors can lose some or all of their principal.

Always consult with a qualified financial professional before making any investment decisions.