If you held tight and didn’t fall prey to desperation and fear over the past few months, you deserve a hearty congratulations. Exercising patience and discipline is something most investors find very difficult when the inevitable market swoons appear. It’s easy to start second guessing everything.
Here's the Truth
Stock values rise OVER TIME, but they don’t rise ALL the time. Bull markets last far longer than bear markets, but you have to EXPECT BOTH. As the chart below depicts, the periods of increase in the S&P 500 Index dramatically exceed the times of drawdown. Regardless of why you are investing or your stage in life, every day you are not in the market is a day you are betting against the odds. It’s just that simple.
Why Invest in the Stock Market?
None of us like to see periods where we have sharp declines in stock prices. But it helps to be reminded of the reasons you are investing in the market and taking on the emotional discomfort in the first place.
If you put money in a certificate of deposit, you might fetch around 2.70% for a 12-month CD according to current data from Bankrate.com. Of course, this return is subject to inflation or buying power erosion running at about 2.2% currently. Then, you have to turn over some of the income to Uncle Sam. Unless you are in the lowest tax bracket, you now have a negative real, or inflation-adjusted return. As one of my colleagues says, “buying CD’s is just a way to get poor slowly.” Historically, stocks have proven to be a protector of long-term buying power while most other asset categories fail this test. That’s the foundational reason to be investing in stocks yesterday, today, and tomorrow.
If you could fast forward ten years and look back to today, do you think you would be as concerned about temporary market declines as you are now? My guess is the answer would be a resounding NO! Time provides the context and perspective you need. Very likely, some or all of what you are investing for is a purpose that is ten years or further out into the future.
What Market History Shows…
While the temporary pullback this past quarter was just shy of 14% for the S&P 500 Index, there have been 18 quarters since 1929 where the S&P 500 index declined by this much or more. The good news is the average decline for this data set is about 21.3%, putting this past quarter in the “better than average” category. Moreover, the average return for the next quarter after a 14% or greater decline is 10.1% and 19.9% for the next year.
We should always anticipate a wide range of possibilities and the year ahead is no exception. These possibilities do not hinge on any single risk factor or potential event, and these risks change every day. Stop trying to isolate the magic item that will make all the difference. Assuming you have long-term goals where you need above-inflation returns, stay invested and stay diversified. Start there. Ready for a real conversation?