After watching the market sell off 6%+ the last three days, there’s a good chance you’ve been expecting a note or call from us telling you where we stand, whether or not we think it’s time to sell, or what’s going on with your money. If you made it past the first sentence, I’d be willing to bet you’re already guessing the rest of this letter is going to be full of the standard “don’t panic,” “this is normal,” and “stick to your plan.” While we do think those simple pieces of advice are sound, they don’t fill the void for some people. So keep reading…
If you’ve been to our office you know that it’s open-air and we all sit in the same room where we can easily talk to one another. On Monday, we were all watching as the Dow traded off 1,600 points at its lowest point. We didn’t think much of it. We looked at each other a few times and said, “Wow, they’re really getting after ‘em today.” And that was about it.
This is why you hired us. We act as an emotional surge protector between you and your investments. Successful investing takes the right mindset more than any other skill. It doesn’t take an MBA, an IQ of 140+, or a fleet of quantum computers to be a great investor. Keeping your emotions in check when stocks are going down will get you much, much further.
When stocks sell off like this, it’s hard not to question what happens next. The most reasonable answer is that neither we, nor anybody else, knows for sure. Stuff like this happens. We’ve come to expect it. It’s just part of the deal.
The long-term history of the stock market can be a useful tool in moments like this. Here are some stats to consider:
- A 10% decline happens every 11 months on average.
- A 20% decline happens once every four years on average.
- Roughly 40% of the time, the stock market is 10% or more from its highs.
- Historically, after a 3-day return of stocks being down 5% or more, over the next five years equities are higher 82% of time and return 75% on average.
Further, consider that the stock market has endured wars, pandemics, depressions, recessions, social unrest, etc. The long run trend is clear: stocks go up and down, then up again. The up periods last longer and pack more of a punch than down periods, and this is why long-term investing has been successful.
The stock market has been volatile the past few days because traders have been reacting to and weighing thoughts of better economic momentum, higher inflation, and rising interest rates. From a technical standpoint, the S&P 500 crossed its 50-day moving average, which sparked a selling frenzy among the algorithm-based traders. Additionally, traders and probably some investors were taking profits and locking in gains given the strong start in January.
These items may seem important now, but in reality they’re just a tiny spec on a van Gogh painting. Rather than remembering the Dow was down 6% from 1/31/18 – 2/5/18 (the tiny spec), investors should remember that the S&P 500 is up 163% over the last 10 years (the van Gogh).
If you take away anything from this post, let it be this. Events like those experienced over the last three days have absolutely no effect on how many burritos Chipotle is going to roll, how many sheets of aluminum Boeing turns into airplanes, or how many searches will be generated on Google.
The investors who sell when stocks are down create a huge amount of damage to their long-term wealth. Not only are they selling themselves short by getting out, they are selling at the exact time when future returns are at their greatest potential. The biggest cost related to investing is (and will remain) emotional currency.
Bear markets do happen, but they’re not predictable events. It’s worth reinforcing our belief that volatility (short-term up’s and down’s) is much different than risk (opportunity cost of higher vs lower returns). We believe stocks will continue to provide the best returns of any investment vehicle over time and today’s pain is forming the foundation for tomorrow’s gain.