Paul Meloan – Vested Interest

It’s but one classic line in a series of movies loaded with them.  In The Godfather: Part II, aging gangster Hyman Roth (Lee Strasberg) needs to school the up & coming Michael Corleone (Al Pacino) about the necessity of not letting personal feelings get in the way of business interests.

Knowing full well that Michael had ordered the killing of Roth’s friend Moe Greene, Roth lectures Michael that as angry as Roth may have been about the murder he knew that it was an inseparable element of life in organized crime.

Roth put aside his anger, “for this is the business we’ve chosen.”

If Hyman Roth were lecturing Michael about the vagaries of stock investing, he might likely say the same thing about corrections and bear markets.  Bear markets are upsetting and difficult, but worrying about them (or worse, reacting to them) only stands in the way of getting what we really want: a portfolio that will grow and preserve purchasing power over the long run.

There is no specific definition of a correction or bear market, but a reasonable one is that a correction is a draw down of at least 10% from a peak value, and a bear market is a draw down of 20% from a peak and lasting at least two months.

In a recent piece on the subject, Vanguard offered some insight into the frequency and effect of corrections and bear markets.  Bottom line: in the past 36 years the global stock markets have experienced either a correction or a bear market about every two years on average.

The fact that markets have been in up-mode almost without interruption back to early 2009 should remind us that stock markets without corrections are the exception, not the rule.

Another factor of bear markets is that they remind us that the hard part about being a ‘buy and hold’ investor is not the ‘buy’ part, it’s the ‘hold.’  Holding sufficient cash to pay bills (plus a contingency or two) is the greatest ally a ‘buy and hold’ investor has in confronting the stress and anxiety of a portfolio now worth a fraction of its previous value.

True, cash represents what economists call an opportunity cost. The nominal return on cash assets is zero, which means the real return (after inflation) is negative.  However, if we follow the flows of funds into- and out of stock mutual funds we know that retail investors pull money from stocks when they’re down, and return money to them after they recover.  That is called ‘buying high’ and ‘selling low.’

If paying an opportunity cost is what it takes to keep you from making this mistake, it is money very well spent.

Paul Meloan is the co-founder and co-managing member of Aegis Wealth Management, LLC, in Bethesda, Maryland USA. Before Aegis Paul was a practicing attorney as well as working in the tax practice of Ernst & Young, LLP.

Next Post