It’s a cliché but common aphorism: “Those who cannot remember the past are condemned to repeat it.” (Thanks, Philosophy 101 and George Santayana.) Looking at the stock market through the lens of history, it sure is an interesting case study into the human psyche. The market is an amazing tool for financial freedom and security when handled correctly. But, if handled incorrectly, it can be the source of angst and frustration. Investing is a big part of financial planning. Over the course of my career, I’ve worked with thousands of clients who’ve entrusted me with their most valued asset – their life savings. This gives me a unique perspective; I understand the connection between money and emotions. Money, for better or worse, has an enormous impact on our individual happiness. It’s one of the hardest components of giving advice in financial planning. When portfolios are constructed, we do so in a fundamental, academic, and unemotional way. When communicating the investment plan; we must connect on a more emotional level. This connection provides a deeper understanding and allows the clients’ strategy to work over time. Given the recent market volatility, it’s imperative to go back to basics. Volatile times like these evoke intense emotions. Thus, I want to provide a remedy to calm those nervous symptoms. Where to begin? Perspective. One of the best places to start is perspective. It’s the great equalizer and can help set any mind at ease. For starters, we have to recognize that investing in equity markets is a long-term investment. Even those entering retirement need to plan for the next 20-25 years at minimum. If you think about it, you should likely have exposure to equities for the rest of your life. Equity investing isn’t a roller coaster you hop on and off again every few years. To get the highest probability of success, you must ride to the end. Look at a long-term chart that shows the value of equities. You’ll often find the underlining theme is equities rise in value over time. The issue is when you take the chart and break it into smaller chunks. That’s when we see all that volatility. This exercise should remind you this is a long-term strategy. Short-term volatility is normal.
Let’s review some figures to help highlight my point using the Dow Jones Industrial Average. I’ll reference the DJIA as it’s often referenced as representative of US equities.
If you take the very short term view, you’ll see October has been a terrible month for the stock market. You might even think this volatility hasn’t occurred in years. Let me highlight how far back you’d actually have to look. It may surprise. In fact, you’d only have to go back to earlier this year. As of market close on January 26th, the Dow Jones peaked at 26,616 points. Two weeks later, it fell to 23,860 (or -10.26% on a total return basis)! What appears to get lost from February 8th until our most recent speed bump is that the markets chugged along to a new all-time high of 26,828. This left most feeling good about the state of US equities. The reality is, down turns of this magnitude in the short term occur more often than we remember (on average 1-2 times a year). These memories are suppressed until fear triggers them again. Then, back to panic mode!
Now, the long view. Instead of focusing on the two market pull backs this year, focus on how this plays out over a 10 year time span. Hopping in my time machine, we go back to October 2008 and the throes of the Great Recession. The Dow Jones was coming off all-time highs, peaking at 14,164 on October 9th, 2007. A little over a year later, on October 29th, 2008, it closed at 8,990. It continued sliding all the way down to 6,507, when it bottomed out on March 9th, 2009. An epic slide to say the least. If you happened to sell then, you likely have never and will never rebound. Let me repeat that for emphasis: If you sold your portfolio during the Great Recession, you likely have not and will not ever rebound. If you stayed the course, you’d see your US equities grow roughly 13.43% annualized (10-year annualized return for the DJIA TR (ending 10/29/2018) was sourced from Kwanti Portfolio Analytics)! As a reminder, that return number factors in all the ups and downs seen since 2008. Instead of getting nervous and abandoning your strategy, let’s say you were Rip Van Winkle. (Can you tell I have 3 children age 6 or under?) You fell asleep for the past decade and now you wake up in disbelief. We have electric cars and the Philadelphia Eagles won the Super Bowl. Even more so, you’d think it was a stable decade in US equity markets, as you saw the Dow Jones Return Total a whopping 13.43% annually. Not too shabby if you ask me. You see, taking the calm, steadfast approach to investing is the only way I know to navigate these volatile markets.
This time is different though, right? That statement couldn’t be further from the truth. This bout of volatility will pass in time. Those dedicated to financial freedom will generally benefit as they do, so long as they stay the course. This doesn’t downplay the importance of diversification and working with a fiduciary. Sadly, I don’t have a crystal ball. I will not know the markets’ outcome for the rest of this year, or the next year, or the year after that. What I do know is once you take a step back and reflect, you’ll recognize you are investing in some of the greatest companies in the world. Many of these are the same companies you interact with every day. It is my experience a solid financial plan will give confidence to stay the course. You’ll feel that confidence maximizes your ability to realize your goals. The key is to remain committed to that plan and not let market volatility, and thus your emotions, derail you. I hope this allows you to see the forest for the trees and help sift out the noise. Diversified takes great pride in educating clients about the importance of managing a plan. We emphasize not letting short-term detractors get you off course. Time, while difficult in the short-term, is one of the best tools to a great financial plan. If you’d like to discuss anything in this article, or better understand how time can help your plan, give us a call (302-765-3500). We have the time to help