If we ever needed a demonstration of how the market can throw you a serious head fake, we just got one. After a down Q4, with the month of December being particularly rocky, the first quarter of this year was just splendid. Domestic equities and REITs rose more than 15%, with the rest of the world’s equities rising just below 9%. Even bonds, both taxable and muni, rose between 2 and 4% [1], as long-term interest rates declined. Everything worked!

If you recall the letter we wrote Christmas morning, a bad fourth quarter got dramatically worse in December, with the worst Christmas eve in memory potentially ruining the holiday for some and causing panic for others. That is the kind of moment where you can fall prey to your fears and make a bad mistake.

Anyone who sold in those last few down days got a bad case of whiplash when equity markets rebounded very sharply right after Christmas. As you will recall, the Dow set an all-time record for points risen, going up over 1,000 points in one day! [2] As if the market were saying “gotcha!” to people who fell for the head fake and sold equities.

And here is another lesson professional traders learn early (if they are to survive) – when you are wrong, admit it and adjust quickly. If you sold in a panic in late December and then watched the Dow rise 1,000 points while you stood on the sidelines, you probably did not want to admit your mistake and buy back, locking in the loss. Instead, as behavioral finance tells us, you might have “anchored” on the lower level in your mind and decided to wait until the market came back down before buying.

If you made that second mistake, you got to enjoy watching the best first quarter in several decades from the sidelines. First you missed the quick rally at the end of December, so you doubled down on your mistake by staying out of the market and missed this marvelous first quarter. So now what do you do? This has to feel horrible. And the right thing to do even now is admit your mistake and buy back into your long-term asset allocation, but will you have the stomach for taking that step after all this pain?

I am writing this on the plane, and as we consider whether you should man up and bite the bullet or not, I see on my little TV screen that the market is continuing to rally. Seems like every day that goes by leaves you farther

behind. Investors who take a wrong turn down the market timing path can find it very difficult to get back on track.

Forgive me if I seem a little too blunt in describing this situation, but this is a very serious issue for all of us. We are human, we experience fear and greed, and we hear lots of bad ideas from a variety of sources, happily chattering away as if they knew something. It can start to seem “obvious” that everything is going wrong and this time is different and…. well, you know the rest. Discipline is a wonderful thing, my friends!

Best Regards,

Roger Hewins

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[1] Q1 2019 index returns provided by Morningstar.

[2] Imbert, Fred, and Eustance Huang. “Dow Rallies 1,000 Points, Logging Its Biggest Single-Day Point Gain Ever.” CNBC, CNBC, 26 Dec. 2018, www.cnbc.com/2018/12/26/us-futures-following-christmas-eve-plunge.html.

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