Wildfires & Bear Markets Are Very Similar

 Hoo boy, I've had a jam packed couple of weeks. 

We've been dealing with the Crooks Fire which is the most serious wildland fire threat Walker's ever had for being so close and having some topography where it is very difficult to fight fire. The Goodwin Fire in 2017 was similar but I am quite certain this one is worse but I think were close to being able to talk about it in the past tense. Looking this way, the fire has been getting better to the point where as of 45 minutes ago, smack in the middle of the "burn period," there's maybe the lightest of haze to the right of the high point.

 

 

At the same time the stock market has been enduring something of a fast decline, having its own wildfire so to speak.

The large fires involve a lot of briefings (thank goodness for Microsoft Teams on this one), a lot of community communication, a lot of firefighter work and a lot of fire chiefing. The list of things for stock market panics is shorter in that I need to read, be ready to place a trade if need be, be prepared for client calls and proactively reaching out to clients with an update which I did earlier today. 

For a wildfire, where geographically relevant, you can mitigate your home by not having firewood under your deck, limbing up the bottom of trees, cleaning up forest litter on your property and raking pine needles away from your house, essential removing things within 25 feet of your house that can burn. A ground fire will stop creeping when there is no fuel to burn.

For a bear market you can assess when risks for certain negative outcomes are elevated and start to mitigate those risks by reducing or even eliminating exposure. For an investor, a ten year US treasury yielding 2% or less, I would say 3% or less, was never a good investment. Maybe a good trade for someone nimble enough to do that but not a good investment. 

We've been talking for years about interest rates being too low to invest in anything with interest rate sensitivity. We've been talking for a shorter period about the risk for price inflation increasing and about stock prices being vulnerable, wondering if an overly stimulative FOMC, grossly so, would cause problems. I had no idea when any of these things would matter or if they would matter but the risks were simple to observe.

Nate Geraci had a thought provoking Tweet, "*This* is the year active management outperforms, right? Right? If not now, when?" My answer was "A moderately competent will have some years of out performance, and some years of under performance but at the SPIVA level, it will always lag. As an RIA using an active strategy my goals are making sure clients capture the effect of big up years and making sure income needs are not disrupted in down years."

SPIVA is an annual survey (I think it's annual) that seems to always show active managers lagging. It will never show the majority of active managers outperforming. The idea of capturing is something I've written about often. If the S&P 500 is up 19% in a year, the equity portion of the portfolio, assuming there is one, regardless of the percentage allocated should be close. 15% offers participation I'd say, but 3% does not. I will note I have several clients who've wanted to position toward more of a game over allocation so that will play out differently. 

I have no idea how long this market event will last but making sure clients regular financial needs are met is a very high priority. We have cash set aside in most instances and if the market drops a lot, then the many volatility dampeners/diversifiers/hedge products I use should go up a lot and I'd be able to sell those for more cash if this things lingers.