There was a little bit of a downturn in the stock market yesterday, around 1.7% if I recall. I really didn’t pay attention too much to the news. So, what of it? In the few fleeting seconds I was forced to watch a news story yesterday, I heard “plummet”, “collapse” and “plunge”. That’s all I could recall before I got my hand on the remote and went back to Monday Night Football.
A one-day decline of 1.7% along with a 4% decline since September 2 looks an awful lot like the beginnings of an ordinary run of the mill correction – unless it’s not. Therein lies the question we are all (well, not all – certainly not me) seeking. My advice: Don’t go there. Don’t even start.
“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.” – Peter Lynch
Since 1980, the stock market has returned a positive yearly return for 31 of the 41 years. So, 75% of the time stocks were higher at the end of the year versus where they began the year. There cannot be a better example than last year. Stocks started the year up, fell 34% in five weeks, returned to break-even for the year in August and closed 18% higher than where they began the year.
Of the 41 years since 1980 (with the stock market making money 75% of those years), the average intra-year decline was 14%. You read that correctly. Corrections happen about as frequently as your birthday. So, with the stock market up 3 out of every 4 years, it fell an average of 14% every one of those years. That, my friends, is called volatility, not risk.
Another way of looking at this is equity returns have historically been positive, on average, three years out of four. That fourth year – the down one – wasn’t “volatile”. They were all “volatile”.
It is impossible to overemphasize the fact that one huge reason most investors ultimately fail is they actively misunderstand the concept of equity “volatility”. Its cultural connotation is always negative – the media never call a sudden, sharp lead upward in the markets “volatile”. And again, unaided human nature cannot differentiate between temporary decline and permanent loss.
In other words, extreme “volatility” is more a mass emotion than an economic or financial phenomenon. Our commitment to not reacting – to not giving into any mass emotion, but simply continuing to work your plan – will at the very least save us (and you) from making The Big Mistake.
If you would like to chat about anything, please reach out to me or any of our team.