Photo Credit: Steve Jurvetson

An investor can and should learn from the past.  He should never react to the recent past.  Why?  The past can’t be changed, but it can be known.  Reacting to the recent past leads investors into the valleys of greed and regret — good investments missed, bad investments incurred.

We’ve been in a relatively volatile environment for the last two weeks or so.  Markets are down, with a lot of noise over China, and slowing global growth.  Boo!

The markets were too complacent for too long, and valuations were/are higher than they should be, given current earnings, growth prospects and corporate bond yields.  It’s not the best environment for stocks given those longer-term valuation factors, but guess what?  The market often ignores those until a crisis hits.

The FOMC is going to tighten monetary policy soon.  Boo!

The things that people are taking on as worries rarely produce large crises.  They could mark stocks down 20-30% from the peak, producing a bear market, but they are unlikely of themselves to produce something similar to 2000-2 or 2008-9.

Let’s think about a few things supporting valuations and suppressing yields at present.  The overarching demographic trend in the market leads to a fairly consistent bid for risky assets.  It would take a lot to derail that bid, though that has happened twice in the last 15 years.  Ask yourself, do we face some significant imbalance where the banks could be impaired? I don’t see it at present.  Is a major sector like information technology or healthcare dramatically overvalued?  Maybe a little overvalued, but not a lot in relative terms.

There are major elections coming up next year, and a group of politicians harmful to the market will be elected.  This is a bad part of the Presidential Cycle.  Boo!

Take a step back, and ask how you would want your portfolio positioned for a moderate pullback, where you can’t predict how long it will take or last.  Also ask how you would like to be positioned for the market to return to its recent highs over the next year.  Come up with your own estimates of likelihood for these scenarios, and others that you might imagine.

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