Will Rogers once quipped, “The way to make money in the stock market is to buy a stock. Then, when it goes up, sell it. If it’s not going to go up, don’t buy it.” 1 Oh – if it were only that easy!
It’s true that stocks have been all over the map lately, and more down than up for that matter. After almost a 3% drop this past Tuesday, April 26th, the S&P 500 index is down by more than 15% from its high. This is not yet an official bear market, which is defined as a 20% drop from its high, but it’s solidly past correction status. 2
You may have noticed markets have grown more volatile since Russia invaded Ukraine and also since the Fed communicated it would raise interest rates more aggressively. There is no doubt that increased volatility can be unnerving even for veteran investors.
So what does this uncertainty mean for the investment outlook? To answer this question, history is the best guide.
History may never repeat itself, but it certainly rhymes. We know that for almost 100 years, stocks measured by the S&P 500 Index, have provided a long-term annualized return of around 10%. 3
But here’s the thing that trips people up – stocks rarely produce a 10% return in any given calendar year. Since 1980, S&P 500 stock returns have ranged from -36% in 2008 to +37% in 1995. Only in 1993 did stocks deliver a 10% return. 4
So a better question to ask right now is: “Why am I investing in stocks?” Answering this is the key to knowing whether you should be investing in stocks right now.
Want to make your work optional? Desire to create a legacy for your family? Hope to make a meaningful contribution to a charity that means a lot to you? If you answered yes to any of these or have other long-term financial goals, you may find that staying invested in stocks is a no-brainer.
It’s important to understand that market volatility is just one type of risk when investing, and may not be the biggest risk for you. Other risks to consider are: loss of purchasing power risk, loss of opportunity risk, or the risk of achieving your future financial goals. Said simply, does holding stocks increase or decrease the risk of you achieving your long-term financial goals?
Market returns are never free and never will be. Financial columnist, Morgan Housel, has suggested you should view the volatility risk as more of a fee to pay. What fees do you currently pay that have an expected positive outcome? Housel compares this to entering Disneyland. Yes, you will pay a fee to enter the amusement park, but you view it as a fee worth paying. 5
Here are some things to keep in mind as you move forward with your investment plan:
Risk and return are related – Reframe the market volatility as a fee or tax you pay along the way to gain this superior result over keeping your money in the bank earning very little interest.
Since 1980, stocks have declined by around 15% at least once during the average year. 6
Yet, since 1980, a $10,000 investment in an S&P 500 index fund would have grown to over $1 million before taxes, if you simply left it alone and reinvested dividends along the way. 7
Diversification is your buddy – Nobel prize laureate, Harry Markowitz said “diversification is the only free lunch in investing.” Holding many different types of stocks as well as other asset classes such as real estate and bonds can smooth the bumpy ride out. For example, holding only the S&P 500 stocks during the 2000s yielded a negative result over the 10-year period. 8
Ignore the hype – You will continue to see “experts” in the financial press tout that picking stocks and market timing works in periods of volatility. The evidence points to this being far from reality. A recent study reported that over 80% of professional stock pickers fail to do as well as simply investing in the S&P 500 index. If it were that easy to pick stocks and time the market, don’t you think the industry veterans could easily outperform an index? 9
Have a plan and stick with it – When emotions are high, wisdom is low. By having a pre-determined plan of how you will invest and save to achieve your future financial goals, you will find it much easier to stick with your plan through the turbulence. It’s true that you may feel like you’re riding a roller coaster sometimes, but by staying in your seat – you will ensure you arrive safely to your destination.
Final words – It is completely normal to feel worry or fear when you see your money going down temporarily. The key is remembering why you’re investing in the first place and replace the fear of market declines with a greater fear of not achieving your future financial goals.
The content of this article is developed from sources believed to provide accurate information. The information is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. All expressions of opinion are subject to change. This content is distributed for informational purposes only, and is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products or services. Past performance is not a guarantee of future results. Index performance does not reflect the expenses associated with the management of an actual portfolio.