Enduring the Pain on the Way Down
By John Owens CFP®, EA, ECA, CPWA®
I had a chance to take last week off and go on my first true vacation since before COVID. I was lucky enough to join my siblings and brother-in-law on a trip to Yosemite National Park for a week of hiking - chasing vistas, waterfalls, and the truly majestic views of a national treasure.
On Tuesday, we decided to hike El Capitan- a large granite monolith nestled in the park with an out of this world view. It’s about 16 miles round trip with 4,800 ft in elevation gain. We started out early - just after sunrise, and began our expedition. The hike up was brutal and literally breathtaking. Amid the silence in nature all I could hear at times was my pulse as I trekked one foot in front of the other. And while I was able to take in the views, the sound of waterfalls, and the fresh air - the whole way up I thought about how much easier it would be on the way down.
After several hours of hiking we made to the top of El Capitan - enjoyed our lunch and some much needed rehydration, and then began our descent. I was initially able to pick up the pace and capitalize on the downhill, but when we arrived at the switchback trails that comprise the final 2800 ft in elevation decline - and the last few miles, my knees and ankles felt like those of the washed up highschool athlete I am. And the slog down the mountain was painful and exhausting. While I had my breath, and my heart rate was more normal, my bones, muscles and joints were the new culprit.
This whole situation feels quite analogous to the market today. The breath taking, painstaking ascent to becoming a public company, only to have more, unanticipated pain on the other side of that liquidity event - much like I felt coming down the mountain last week.
Thankfully, I had some tools for my descent that made it a little easier. Those Merrill Moab Hiking boots and my trekking poles provided some great support. My hiking companions waited for me instead of leaving me behind. I packed ample water and nutritious snacks to hold myself over. And I eventually made it to the bottom of the trail. A week removed from that experience, the only battle scars I have to show from it are some blisters.
So when we think about the current market environment overall, and take a closer look at the tech space which has been hammered in recent months, we have to ask ourselves - what tools do we have for this painful descent that can limit the long-term scars?
Trading Plan as our Trekking Poles - In times of distress we need some more support. Something we can lean on to guide us. In the hike up (and down) the mountain, I relied on trekking poles. In volatile markets, we must rely on predetermined trading plans. They help us from losing our footing, from stumbling and causing more damage. We might wish to think we’re strong enough on our own to make the right choice, but losing our footing could be very expensive - there’s nothing to say that the next step down will be any easier.
Advisors as our Hiking Companions - It’s not easy to hike alone, especially on an excruciating - day long hike with peaks and valleys. I was lucky enough to have some companions that made the journey more bearable. They kept me focused when it was easy to get distracted by the other hikers moving quicker, the trail runners barreling past, and the tourons jumping and taking shortcuts. During this volatile period, it’s our job, as your planners, to help you keep your eyes on prize and avoid getting distracted.
Perspective as our Hydration - Water, pedialyte, and some snacks were key to keeping my body going for the hike. In this journey of volatility, the real nourishment we need is perspective. So I have a little bit to share:
Bonds are starting to yield something: for the frist time since late 2018, the 10-year Treasury is paying more than 3%. You’re still losing out to inflation in the current environment, but we’ll finally get some yield from safer holdings that’s been largely missing since before global financial crisis.
Valuations are more normal now than they’ve been in years: The S&P 500, as of Friday, was trading at 17.5x its forward earnings - which is just slightly higher than the 25-year average of 16.9x earnings. The market isn’t nearly as expensive as it was just a few months ago. As ongoing investors - contributing to 401(k) accounts, investing with stock sale proceeds, etc, we’re getting a better price.
Rotation is happening - Value stocks are beating growth stocks for the first time in years with value out-performing by 15% year-to-date. TL;DR: diversification still works, and folks who sell off concentrated equity are having a much smoother ride.
This pullback, on a broad scale, is normal - the S&P 500 normally drops 14% in a given year, despite producing positive returns 32 of the last 42 years.
So, how did things end up? I made it down the mountain. Within a few days, the pain wore off, and I now reflect on the experience as an accomplishment. If I didn’t pack as much water, if I forgot my trekking poles, or went alone, I’m not sure the outcome would have been the same.
While the recent volatility has brought prices down and made looking your portfolio less palpable, there is ultimately a flatter terrain we’ll eventually arrive at. It remains to be seen when we’ll reach the bottom of the mountain, but in the meantime let’s lean on our trekking poles, our hiking companions, and stay hydrated - it’s the only way to flatter, steadier footing.