It is certainly an understatement to say the markets have gotten off to a rough start this year. In fact, this has been the worst start to a year on record with the US and International markets all down approximately 10% since January 1st. Many are feeling nervous, anxious and just plain unhappy when they see the lower values on their account statements and weekly update emails. We think it is important to first acknowledge that these feelings are normal and justified. A good investment plan should be fairly simple and straightforward, but it is in times like these that it becomes all too clear that simple and easy are two very different things.
Below are some common questions we have been asked over the past couple of weeks:
What is going on? Put simply, the markets do not like uncertainty. The slowing of China’s economy and the precipitous fall of oil prices have both caused more questions than there are currently answers. Just how severe China’s recession is and the repercussions to be felt in the global economy are still to be determined. The lower oil prices, while good for consumers in many ways, is bad for business. Just how bad, and how it will affect the economy, again this is yet to be determined.
Why don’t we sell everything and wait this out? This is a common urge when markets are having an extended downward period. We were recently asked a hypothetical question that went something like this: If someone from the future came back and told us that the markets will definitely go down 15% in the very near future, would we get out of the market knowing ahead of time of the pending downturn? Now of course, this is just hypothetical and no one could know this with certainty ahead of time, however even with this information our answer was that we would still not get out of the market or make drastic changes to our investments. How could this be? The issue is that in order to successfully time the market our “fortune teller” would have only given us half of the information we really need. The second part of the equation is when will the market go back up, hence when we should get back in. This is what makes market timing so dangerous and virtually impossible. To illustrate just how difficult this has been, the graph below shows the annual return of the S+P 500 for someone who was invested every single day from the beginning of 1988 to the end of 2015. The US Stock market was open for trading approximately 6,800 days during this period. The table illustrates how significantly returns differed based on someone who missed the best 10, 20 or 30 days during that time period:
Source: Standard & Poor’s and Lord Abbett. Returns are measured based on the S&P 500® Index. The “best” days to be invested are defined as those on which the S&P 500 Index delivered its highest returns for the given periods based on historical data. Annualized return and total return assumes the reinvestment of all dividends and/or capital gains.
How can missing just a few days have such drastic results on performance?
It turns out that as quickly as markets can take a turn for the worse, they often rebound in the same quick and unexpected fashion. For example, take October 19, 1987, which is now referred to as Black Monday. The S+P 500 dropped 20% in that one day of trading. This was certainly a time of extreme angst and worry as people tried to process why this happened and what it meant. Many experts painted a gloomy picture for the future after Black Monday but the market unexpectedly recovered into positive territory for 1987 and went on to have very strong years to follow. In more recent history, the last quarter of 2008 and the first quarter of 2009 were some of the worst in history as we worked through bank closings, the housing crisis and a sharp recession. In the 2nd and 3rd quarters of 2009 the market recovered about 16% in each quarter. These returns were missed by many investors on the sidelines waiting for the economic outlook to improve.
What actions can I take that will help?
Remind yourself that while you stay invested you are still receiving dividends that can be reinvested back into your investments. Therefore, you are automatically buying more shares at the lower prices. This ends up being very powerful when the market recovers and you have a larger share base that appreciates.
For those still in the accumulation phase, consider a systematic investment plan where you are investing money on a monthly basis. This is particularly powerful in a market pullback as you will be buying more shares at better values. It is helpful to train yourself to think about market pullbacks as opportunities to buy more at lower prices and it prepares you for the inevitable downturns.
We encourage you to stop paying attention to the headlines in the financial news. The financial media is in the “ratings” business and they over dramatize everything in order to get people to watch. Keep in mind that the media’s short term “predictions” on the direction of the market should have very little consideration on your long term plans.
As a reminder of this, we thought we would share an article from the Wall Street Journal from just one year ago, in which nearly two dozen “experts” gave their opinion regarding the anticipated direction of the S&P 500 in 2015. The average anticipated return among the strategists was an increase of 8.2 percent. As we now know, the S&P 500 ended 2015 in negative territory for the year, and you will notice that not one of these analysts were correct in their prediction! http://blogs.wsj.com/moneybeat/2015/01/02/wall-street-strategists-expect-stocks-to-keep-climbing-in-2015/
Lastly, don’t go at it alone. Having an unbiased advisor to lean on can provide you the support and discipline to stick to your plans and always put your best foot forward. We always get reminded in times like these that while a good financial plan should be straightforward, it’s certainly not always easy. We’re here to help.