anchor

World’s Biggest Roller Coaster?

© Can Stock Photo / winnieapple

The biggest roller coaster in the world is Kingda Ka, at Six Flags Great Adventure in New Jersey. Sometimes investing provides a similar experience.

We have written before about the lovely decade of the 1990s, when the major stock market averages more than tripled. When you get up close and really look at what happened, however, it looks a whole lot different. We examined the data for the S&P 500 Stock Index.

During that decade, there were 1,171 trading days when the S&P went down. The total points “lost” on those days adds up to 5,228. Put that in perspective: the decade started at just 353 points! The down days “lost” more than fourteen times the beginning value1.

Who would knowingly stick around if, on the first day of the decade, we knew that 5,228 points would be “lost” on the down days?

There is a reason we put the word “lost” in quotation marks. It might be more appropriate to speak of temporary declines rather than losses. We say this, because of what happened on the other 1,356 trading days in the decade.

On those up days, the market went up a total of 6,344 points—or more than 17 times the beginning value1. If we knew only that piece of the future at the outset, money might have flooded in.

The bottom line is, here is how we got a triple in the market: it went up 17 times its original value, and down 14 times its original value, in totally unpredictable bits and pieces of rallies and corrections. Patient people prospered.

It is hard to argue with a triple. That is a fine result. This is why we talk incessantly about the long term, long time horizons, keeping the faith, following fundamental principles, and not panicking at low points.

During the decade, how many times did 10% corrections have to be endured? 20% bear markets? Were there any 30% or 40% losses? WHO CARES? It didn’t matter to long term investors.

Clients, if you would like to talk about this—or anything else—please write or call.

Notes & References

1Standard & Poor’s 500 index, S&P Dow Jones Indices: https://us.spindices.com/indices/equity/sp-500. Accessed October 3rd, 2018.


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 economic forecasts set forth in this material may not develop as predicted.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

 

Is a Drop a Loss?

canstockphoto7038266.jpg

We humans use stories about events great and small to help understand the world. One of the common stories about the stock market contributes to a great misunderstanding, however.

A market decline from some higher point in the past is often spoken of as a loss. Yet whenever the market is trading at an all-time high, every past downturn has been fully recovered. One might ask where the loss actually is.

To illustrate, the decade of the 1990’s was a good one for the broad stock market, as measured by the S&P 500 Stock Index. It more than tripled, rising from 353 points to 1,469. Yet of the 2,527 trading days of the decade, 1,171 saw a decline—a drop—in the market index.1

Those down days represent a cumulative 729% in “losses.”1

In a decade when the market tripled, how does it make sense to speak of losses during the interim? Particularly losses equal to many times the beginning level?

The market is volatile. Values fluctuate. It goes up and down. But if you have long term goals, it might pay to focus on long term results, not temporary downturns. If you invest next week’s grocery money in the stock market, then yes, a temporary downturn will result in a loss when you sell out in order to buy food. Otherwise, we would say a drop is not a loss.

Note: one should never invest next week’s grocery money in the stock market.

Our business is striving for long term results for people who share our time horizon and philosophy of investing. We talk about it every way we know how, in many venues, to reinforce effective investing attitudes and to forewarn those who lack them.

Clients, if you would like to talk about this or anything else, please email us or call.

1Standard & Poor’s 500 Index, S&P Dow Jones Indices. Retrieved September 18th, 2018.


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 economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Stock investing involves risk including loss of principal.

 

Optional Thinking

© Can Stock Photo / lisafx

Readers know we believe there are those financial arrangements that maintain stability and those that may garner long-term investment returns. But anything that promises both stability and high returns is not likely to work out that way.

The uncomfortable truth is, we must live with volatility in order to have a chance at market returns. Short-term market action cannot be reliably forecast, nor profitably traded, in our opinion.

Yet market values can be volatile. Imagine an account of $500,000: a 20% drop would shrink it to $400,000, while a 20% gain would grow it to $600,000. How do people stand it?

First, long-term clients tend to take the long view. If that $500,000 account started as a $200,000 account years ago, the owners remember where they’ve been. That original investment is their anchor: any value above $200,000 represents a gain from that beginning value. (We are talking about the effects of time and compounding, not claiming any unusual investment results.)

Second, the long view helps clients understand that volatility is not risk. Put another way, as we’ve written before, a short-term drop does not necessarily represent a loss. How should we view that $500,000 value dropping to $400,000, in the long view? Relative to the original $200,000, it’s still a gain. Worrying about drops as if they are losses is optional for people who are investing for many years or decades down the road.

Third, even while staying the course over the long haul is important, strategies need to address short-term needs. For those who are living on their capital, knowing where the cash is going to come from is vitally important. With secure cash flow, it is easier to live with the ups and downs in account values. We call this pursuit of opportunity “owning the orchard for the fruit crop.”

This perspective requires a certain confidence that we will stumble through any problems and likely come out of whatever troubles have arisen. Optimism is sound policy, for if we are going back to the Stone Age, it won’t matter what is in your portfolio anyway.

Clients, if you would like to talk about these ideas or any other, please email us or call.


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.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.

 

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.