Stock Market Declines. Normal?
It’s January 8, 2016 and the U.S. stock market1 year-to-date has fallen (4.93%), the Dow Jones Global Total Stock Market has dropped (5.28%). One headline reports this to be the worst start for the markets since the markets began trading. What’s to blame this time? China. (Yes, same concerns that befell the markets late summer 2015). Should I sell out? Is it time to panic? Did I make a mistake investing in stocks? I don’t like to see my value drop, what should I do? These are fairly common questions in times like this. For those who are wondering what to do, we advise the following.
1. Review and Adjust Your Expectations.
Investing in equities (stocks) without understanding the role of volatility can lead to decisions based more on emotion than logic. Most people invest in stocks with the expectation that there will be declines but once they are actually experiencing it, somehow it’s different than what they expected. They never expected the news to be so bad. They never expected to be made to feel foolish. They never expected to hear how different this decline is from the past and how, surely, it will continue indefinitely (just listen to the news, they will tell you!). What they may be feeling is called “Loss Aversion” (yes, there’s a name for it). Simply stated, we hate to “lose” money (even though all past declines have fully recovered in time, we still like using the term “lose”). It’s NOT wrong to stick to your plan nor to have conviction in an asset class that has a compelling history of delivering premium returns over long time periods. This same history has shown the markets post a negative return on average 1 in every 4 years (it’s to be expected).
2. Make Volatility Your Friend, Not Your Foe.
Did you see the recent headline “STOCK MARKET VOLATILITY DOWN!”? Me neither, I don’t think it exists. It should, according to J.P. Morgan Asset Management’s most recent Guide to The Markets, volatility peaked in 2008 and was down 16% in 2015 from the five-year average. My point here is not to celebrate declining volatility (volatility is a key component of a premium rate of return), it’s merely to point out media bias towards what is perceived to be negative, i.e. volatility. I learned a long time ago that any efforts to dampen volatility will likely result in dampened return. It’s human nature to want a premium rate of return with little or no volatility. However, it’s not realistic. For some, it’s time to reprogram the way you look at volatility. History has shown it to be an ally for those who seek a premium return (or look to maintain the purchasing power of hard earned savings dollars). The long term investor need not fear volatility, but come to know and respect it.
3. Keep in Mind That Headlines Change Rapidly.
The culprit today may be China but that won’t last long (maybe not even until the next CMU article is written). The need among financial journalists to link a current event to stock price movement is consistent over time and persistent throughout the world. The talking heads and prognostics will play a theme until its old enough to lose your attention, then they’ll move on to a new one. That’s not to say there aren’t real problems and that we needn’t be aware of what’s going on around us but when compared to the complexity of the global marketplace and when we consider millions of investors are making individual buying and selling decisions, any single event becomes a spoke in a very large wheel.
4. Be Selective with Your Informational Resources.
History does not guarantee future results but it’s a pretty good guide. We do our very best to provide timely and relevant information to investors through resources like Capital Markets University, TGIF with Rick and Alan and a multitude of resources on our website (www.ownyourtime.com). Those with strong convictions to the resiliency and efficiency of the capital markets tend to have a better investment experience. Our objective is to help our clients understand how the capital markets work, develop and maintain realistic expectations and avoid costly mistakes. Find a resource (whether us or another) that strengthens your convictions for your current strategy and plan. If the one you are using is not doing that, it’s probably time to change.
- Rick O’Dell
