A recent conversation with a die-hard New York Jets football fan was similar to conversations that I have with stock market investors. Most New York Jets fans (due to the team’s tough and heartbreaking seasons of the past) are conditioned to protect themselves emotionally by always looking at everything the Jets do negatively. Many stock market investors have a similar inclination.
However, the reactions of both groups should not be the same.
The New York Jets fans have not won a Super Bowl championship since Joe Namath shocked the world in 1969. Since that time, they have only made the playoffs six times and the hopes of the fans have always ended in misery. A popular phrase after a devastating loss at MetLife stadium is “the same old Jets”.
Even last year, the New York Jets only needed to win their last game in Buffalo to reach the playoffs and as most New York Jets fans predicted, they lost continuing the streak that has lasted 45 years. You can understand why these fans analyze each move made by management concerning their players and coaches and always perceive their movements negatively.
Stock market investors seem to have a similar approach concerning the stock market. When the stock market declines as it did in January and February of 2016, many investors seem to approach these declines as if the stock market record was similar to the New York Jets.
They respond to these temporary declines by withdrawing money at the stock market lows as if they are responding with a similar phrase as the New York Jets fans – “same old stock market”.
However, nothing could be further from the truth. The history and the record of the stock market is one of significant success. It’s long-term track record is more attuned to combining the San Francisco 49ers of the 1980’s with the New England Patriots in the 1990’s.
The S&P 500 Index (1) – proxy for the U.S. stock market with 500 of the largest U.S. companies represented – averaged 11.8% per year on a total return basis. (Total return includes interest, capital gains, dividends and distributions realized over a given period of time.) To achieve this return, investors would have been required to stay invested in the index for this entire time period including when the index lost 22% in 2002 and 37% in 2008.
Many investors are confused by this 11% percentage because it does not reflect their performance during this time period. That is because they reacted to market declines by selling their market holdings during this time period. It is similar to your favorite team losing the first few games of the season and deciding to cheer for another team only to see their favorite team recover and win the Super Bowl.
Investors need to understand that these “bad performance” years are not an indication of pending failure.
As we begin a new NFL season, New York Jets fans will continue to be apprehensive about their chances due to their actual history. Investors on the other hand should approach investing with the understanding that the stock market’s history is one of a glorious success. Do not let short-term market declines waiver your conviction on its ultimate success.
Work with a behavioral advisor to ensure that temporary declines don’t have you abandoning the ship just when the stock market starts to another championship year.
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(1) – The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe. Indexes are unmanaged baskets of securities that investors cannot directly invest in.