Don’t Let Your Anchor Drown You

© Can Stock Photo Inc. / dubassy

When the market has been volatile and seems to be trending lower and account values are shrinking, we frequently look back to the high point, and shiver at the loss since that time. Some clients have told us what their accounts were once worth, and what they are worth now, in order to get across how the losses are affecting them. It is not good fun for anyone. Behavioral economists refer to the first number in those comparisons as the “anchor.”

Since the beginning of 1950, using the S&P 500 Stock Index as a proxy for the broad stock market, there have been 16,630 trading days. On just 1,175 of those days was the market trading at a new high—about one day out of 14. On the other 15,455 days, one could have bemoaned the “loss” from the prior peak. In other words, 93% of the time, one could say money had been lost.1

But in this same period, the S&P rose from 16 to 1,880!1 Does it really make sense to say we were losing money 93% of the time, when we ended up with 117 times what we started with? We think the final destination is far more important than the ride we took to get there.

Of course, this time feels different. Mainly because it is here, right now, in our faces. And for some fraction of that 93% of the time, the change from the prior peak was just a little bit. So we went back and figured out what part of the time the market was down more than 10% from its prior peak—in ‘correction’ territory, as the gurus would say.

Surprisingly, the market was in correction territory, down more than 10%, on 6,372 days—right at 38% of the time or about three days out of every eight.1 A lot of misery was endured (or ignored) on the way to that 117-fold gain.

So thinking about the broad market, the S&P 500 Index, it might not be appropriate to anchor to the 16 point reading back in 1950. That was a long time ago, after all. 1960, at 55 points, might also be too far back. The right anchor, depending on your age and length of investment experience, might be the 80 points in 1970, or the 120 point level reached in 1980, 350 points in 1990, or the 1400 point level from the year 2000. The anchor that could drown you is that last high point—2130 points in May of 2015.

In Outcomes May Vary we wrote about the consequences of selling out at low points. Usually, those who do so are anchored to the last peak, focusing on paper losses. That is why we are encouraging thoughtfulness is choosing anchors. Write or call if you would like to discuss your situation.

1. Original research, based on analysis of historical records of Standard & Poor’s 500 Index.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.