Once upon a time, a trade war destroyed the market.
Or it was the biggest buying opportunity since 2008?
Apple can’t innovate.
Or is it poised to become a healthcare giant?
Semiconductors are dead.
Or merely sleeping?
Cannabis is the future.
Bitcoin is the new gold.
Or a scam?
This is a dip in the bull market.
This is a bounce in the bear market.
We are in an age when everyone from your kid, to CEOs of public companies, to the President of the United States uses Twitter to promote their agendas. Fake news, social media accounts and single tweets have the ability to make a stock, or the whole S&P 500, sway like your granny after too many fingers of Drambuie.
Then there are the narratives we tell ourselves (“I had to cut my losses”) and narratives we really want to believe (“this time it’s different”). As hard as we might try to be objective, investment decisions are deeply rooted in what happens in our own heads.
In the face of the market-moving, emotion-inducing, daily drama, how do we (forgive me for saying this) stay calm and carry on?
- The stock market, like the sun, always rises. As Peter Burke, CEO of Global Century Investments, advised in “Straight Talk on the Stock Market” (Saturday Night Live, 2009): “ The market goes up, the market goes down. But, over the long haul, the market goes up.” He might have been a fictional character in a satirical TV skit, but he is not wrong… The average annual return for the S&P 500 since it began in 1926 through 2018 is approximately 10% (Investopedia). This chart provides a visual of its upwardly rising trajectory over the past 58 years.
- Except when it doesn’t. For most of us, an investment is money you will need to use one day. It’s essential to ensure your risk is appropriate to your time horizon. “Stocks lost around 85% of their value during the Great Depression,” reminds Ben Carlson, director of Institutional Asset Management at Ritholtz Wealth management in New York. “During the 1973-74 bear market, investors in stocks lost well over half their money after accounting for inflation. The 1987 Black Monday crash saw stocks fall more than 20% in a single day and more than 30% in less than a week.” When crashes happen, they hurt. Over a long horizon, these events are but blips in the chart noted above.
- Like true love, the course of profits never runs smooth. In 2017, the S&P 500’s total return was 21.83%. In 2018, it was minus 4.38%. The point at which you enter the market can make a big difference, but over time, staying invested and adding to positions at regular intervals can smooth big waves into relative ripples.
- Cash won’t grow on its own. “There are few sure things in investing … that betas rise over time relative to cash is one of them,” says Ray Dalio, real world billionaire and founder of the biggest hedge fund in the world. (Betas refer to the market returns of major asset classes such as stocks, bonds and real estate.)
And yet, cash is a valid position. During volatile times, trade wars and tweet storms, it can be wise to take profits in positions where you’ve met your goals and keeping some cash on the sidelines. There is nothing wrong and possibly everything right about waiting for an opportunity when the market settles into a more consistent direction. After all, sleeping well is also correlated to better decision making. Or so we’ve been told.