Worried About the Markets? Why?
The recent volatile swing in stock markets around the world has caused unrest with some investors. Of course, the media has jumped on this normal occurrence and made it a focal point in all of their publications, talking points and headlines exasperating the issue and further causing angst in those with money in financial markets. But what is really going on? Here are some thoughts if you are worried about the markets. My question is “Why?”
- Consider how much merit you place in what the media tells you. Ask yourself “How does the media make money?” The answer is “By attracting eye balls and ear drums to what they have to say.” What is the best way to attract? Negative news! Is there a conflict of interest in what they report? Yes! Some call it “investment pornography.” The bottom line is the media will put anything out there to attract an audience, but should it be considered reliable investment advice relevant and applicable to your specific situation? No! Do you think you are going to hear an unbiased viewpoint on market volatility and the fact the market declines by 10% on average once per year and it typically takes eight months to recover? No. So why worry?
- The investment research has shown it is not the depth of the decline, but the rate of recovery that is the key to your long term financial projections. Recent research by Michael Kitces has shown that it is not the depth to which stock markets plunge that affect your long-term financial projections, instead it is the rate of recovery that has the biggest impact. The biggest damage inflicted is when we have a “hockey stick” recovery (like in the 70s) vs. a “V” recovery. The 2008 meltdown was a great example when the S&P 500 plunged 57% to its low on March 9, 2009 of 676.53 after reaching its peak on Oct. 9, 2007 of 1,565.15. So when did the S&P 500 get back to this level? March 29, 2013 when it closed at 1,569.19 . . . just four years later. Generally, the steeper the drop, the quicker the recovery and Kitces research shows, “V” shaped recoveries do little to affect the long-term sustainability of your portfolio to support your living expenses.
- Nobody can make consistent short-term market direction predictions. If they could, why would they tell anyone? They could leverage their entire net worth on the next prediction and make huge profits. There are a couple of interesting observations about the numbers above that confirm this. First, many people prided themselves on “getting out in early September before the market tanked.” On Sept. 2, 2008, the market closed at 1,277.58, a decline of 18.4% from its peak a year earlier in Oct. of 2007! Almost a year earlier was the time to get out, not very good timing. Second, if you got out “in time,” did you get back in “in time?” Did you get back in on March 9, 2009? If not, how about within one week of that date? One month? Six months? A year? Missing out on the rapid recovery of financial markets is detrimental to building your portfolio. The bottom line is no one can time financial markets successfully because it requires TWO accurate predictions; when to get out, and when to get in. If you find someone who can, you have to ask yourself “Is it luck or skill?” Second, when you hear the talking heads on the media touting their predictions about when to get in or when to get out, ask yourself “What is their track record?” Believe it or not, researchers have tracked the performance of various investment experts and their ability to accurately predict the future over the long-term is dismal. Click here for a history of bad predictions.
- If you have done everything you possibly can do, there is nothing left to do (except worry?)
Ron Blue teaches there are five things you can do with your money:
- Live within your means
- Pay off debt
- Have savings
- Have long-term goals
- Give generously
If you have been following these principles in managing your finances, you have done all you can do. Therefore, market volatility should have minimal impact on you. Take comfort in the fact you have done all you can do and there is nothing more to be done, particularly about the volatility in financial markets. So why worry? If you are still working on some of these items, no doubt the market volatility may cause you some angst. My encouragement is to use this volatility to be a motivator to get back to the basics and work on these five principles to ease your worry. Alternatively, if you are still having difficulty handling the emotions that come with market volatility, you should consider your current asset allocation, your financial goals and how much you have in stocks. It may be better for you to sit down with your fee-only advisor and revisit your current investment policy to make things more conservative.
Transition Financial Advisors Group, Inc. 480/722-9414
Mitch Marenus, Chief Investment Officer
Brian Wruk, President & Founder
Lucas Wennersten, Financial Advisor