Starting to worry about the market?
The higher the stock market moves, the more money it attracts from investors who don’t want to miss out. And the more nervous investors feel about the possibility (or should I say probability) of market declines. The worry of a market decline is acute if you are older and have accumulated significant assets. The pain of a decline will be sharper because the temporary disappearance of more real dollars. Percentages don’t hurt as much.
How about a few facts?
Since 1948 (we call this the modern era), intra-year declines have averaged 13.4% and the return of the S&P 500 index has been positive in 51 of those 70 years.1
In January 1948, the S&P500 index stood at 14.83 and as I write this on June 21, 2018, the index is at 2770. That’s a 19,162 % gain and an average annual gain of 7.7 % excluding dividends.
During that 70 year period1:
There were 182 declines of 5% or more on average every 4.5 months lasting on average 47 days.
There were 56 declines of 10% or more every 1.3 years lasting 115 days.
There were 20 declines of 15% or more every 3.5 years lasting 216 days
There were 11 declines of 20% or more on average every 6.3 years lasting an average length of 338 days.
(Source: American Funds Guide to Market Fluctuations, February 2018, https://www.americanfunds.com/advisor/literature/detail.htm?lit=322201)
Averages obscure the range of possible outcomes.
Declines have been common and temporary.
The stock market has a history of recovery.
Yes, there were extended periods during which the decline seemed to go on forever. During the period August 1929 through August 1939, the return for the period was -5.03%. During the more “recent” September 1964 through September 1974 period, the return was .49%.1
What happened during those time periods? The Great Depression and then in the ’64 – ’74 period, losing in Vietnam, Great Society spending, move off the gold standard, OPEC Oil Embargo, Watergate, Nixon’s resignation… to name a few (wild ‘n wooly time period to say the least).
Could that happen again. I hope not. But let’s face it, trying to base an investment strategy on Armageddon isn’t going to be the way to accumulate wealth. The world does not end. And if it does… well…
Losses feel twice as bad as gains feel good. We are just wired that way. This feeling clouds people’s judgement causing them to act (sell) during period of fear (of losing it all or too much). But the markets are resilient and the recoveries are strong. You do not want to miss out on rebounds by being out of the market (especially if you sold on the way down). Avoid selling low and buying high. Sure you may feel a strong need to “do something” – especially guys (we like to fix stuff). To paraphrase Warren Buffett and Charlie Munger: sometimes the best thing to do is nothing.
It’s best to stay focused on your plan and your goals. If they have not changed, then why change your investment strategy? A long term view turns out to be the clearest.