You can’t win ‘em all in either venue, but the way you respond to setbacks can determine the prospects for attaining long-term goals.
By Chris Costello
Hopefully you were busy watching the Royals play in the post-season and not focusing on the stock market. But if you were switching the channel over to CNBC (shame on you) or surveying the market, you would have seen a fair amount of volatility in the Dow Jones, and possibly within your portfolio, as well. At first glance, it is easy to panic because you think something is wrong or that the downswing is some kind of sign that the market is going to head even lower.
In reality, the market has been reasonably strong and without much drama for the past few years. In fact, it’s been more than three years since we’ve seen even so much as a 10 percent pullback in the market. That, my friend, is very unusual. (Not nearly as unusual as the Royals making the playoffs for the first time in 29 years, but unusual nonetheless!)
But market pullbacks are not only normal—they are necessary. If investing in the market were a steady, upward climb, everyone would be investing, and there would only be a fraction of the return premium afforded to investors. Historically, the market has rewarded well-diversified investors who have had the emotional and mental fortitude to stay the course—through good times and bad.
In fact, since 1985—the last time the Royals made the post-season—the stock market has had average intra-year declines of more than 10 percent. Consider this: If we look back 29 years to the Friday before Game 7 of that World Series, the Dow Jones Industrial Average stood at 1,356. On Wednesday, October 30, 2014—the eve of Game 7 this year—the Dow stood at 16,974.
Some Statistical Perspective
During the past 29 years, the stock market has grown by a factor of 12, despite the fact that the average intra-year decline percentage was in double-digits. Think of it this way: You have to endure the regular (and necessary) temporary declines so that you can be around to enjoy the exceptional long-term returns. Heck, George Brett failed to get a hit nearly seven out of 10 times at bat, and he is a Hall of Famer! The point is this: The market and baseball players both struggle on a regular basis. It’s part of the game. But it is still possible to build wealth and make the Hall of Fame given enough time, patience and discipline.
Consider these statistics since the year 1900:
• 5 percent market drops generally occur about 3 times per year.
• 10 percent market drops generally occur about 1 time per year
• 20 percent market drops generally occur about once every 3-4 years.
The fact of the matter is, markets will decline. It’s not if, it is when and how many times over the course of your lifetime. As we often say, the difference between a successful long-term investor and everyone else comes down to how you react when the market dips. Do you panic and run for the hills? Or do you stay the course (and perhaps even buy more) when your portfolio value drops? How much would you like to go back in time and buy more during the recession period of late 2008 and early 2009? Sadly, many investors were doing just the opposite during that crisis by selling their investments.
You’d be far better off to treat your investment portfolio with the same logic that you use when buying groceries. When you walk into the grocery store and see your favorite gallon of ice cream on sale for 50 percent off, you probably throw some into your cart and possibly even buy a few extra. The same should be true with the stock market. Sadly, most humans are wired backwards when it comes to treating their portfolios like they treat their everyday purchases.
So to quote Warren Buffett (likely the single most-quoted investment guru of all time), “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful.”
Our advice? Don’t give much thought to the short-term movements (up or down) in the market. After all, there are much more interesting things to pay attention to–like our beloved Royals making it all the way to Game 7 of the World Series!
Chris Costello is CEO of the Retirement Planning Group in Leawood, Kan.