Forever, investors have had to endure the latest headlines on how the stock market was going to go down because of whatever the crisis of the day was.
Do you remember a year ago that the U.S. stock market as indicated by S&P 500 Index fell 8% over the first 10 trading sessions of 2016 alone? Or that the 8.25% loss for the Dow Jones Industrial Average over this period was the biggest such drop throughout the 120-year history of that index?
During this market downturn, the headlines and the “investment commentary” encouraged and warned investors to sell as another 2008 market decline was coming. As you can see from the headlines below, many investors followed their warnings and missed the strong positive S&P 500 returns for the year. Last year helped to illustrate just how difficult it is to out-guess market prices regardless of “expert” headlines.
For the US stock market, February 11, 2016 marked the low for the year. While prices eventually recovered, as late as June 28, 2016, the S&P 500 was still showing a loss for the year. Meanwhile, a number of well-regarded professional investors argued that the next downturn was fast approaching. One prominent activist in May predicted a “day of reckoning” for the US stock market, while another reportedly urged his fellow hedge fund managers at a conference to “get out of the stock market.” A third disclosed in August a doubling of his bearish bet on the S&P 500.
Despite all of this noise, the S&P 500 returned 11.9% for the year and international stocks returned 4.4% for US dollar investors (6.9% in local currency). Once again, a simple strategy of embracing sensible asset allocation and broad diversification was likely less frustrating than fretting over portfolio changes in response to news events.
Every quarter has its fair share of alarmist media headlines. Yet Q1 2016 may have taken the cake with a pronouncement from the Royal Bank of Scotland on February 11 urging investors to “Sell Everything!” It also happens that February 11 was the low point for the quarter and the market has rallied by double digits since that day.
The stock market experience was similar around the globe, with many markets falling by more than 10%. Yet, we’ve historically experienced a 10% decline at some point during every calendar year. So this 10% decline on the S&P was notable only because it came so rapidly at the start of the year. Once it recovered, sentiment followed, and by the end of the quarter there were pundits predicting that all time market highs were “right around the corner”.
Q1 2016 was a textbook example of how NOT to make money in investing. Short-term predictions about the stock market are often worth less than the paper they’re printed on.
Investors would be well served to remember the famous saying of the late great comedian Gilda Radner. She developed a character for her assignment on Saturday Night Live named Rosanna Rosannadanna.
The familiar bit would have fellow comedienne Jane Curtin ask Roseannadanna a question, and Roseannadanna would ramble on with all sorts of commentary that was not related or useful. Curtin would then ask Roseannadanna what her comments had to do with her question. Radner would reply:
Well, Jane, it just goes to show you, it’s always something — if it ain’t one thing, it’s another. It’s ALWAYS SOMETHING.
Investors would be wise to remember this when the next “crisis” is discussed in the news and investment commentary. Stay focused on the underlying companies and the incredible long-term historical returns of the stock market.
During the scariest moments of the financial crisis in October 2008, Warren Buffett wrote an op-ed for the New York Times communicating this ever-presence risk and the history of the stock markets.
“Over the long-term, the stock market news will be good,” Buffett wrote. “In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”
As the Dow is now approaching 20,000 as we begin 2017, stay focused on your long-term goals. A behavioral advisor would help you in this regard.
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