Just about everyone loves summertime (aside from the humidity, of course). For those of us that grew up before the days of tablets and Twitter, summertime often brings back fond memories–playing baseball, catching lighting bugs, playing flashlight tag in the neighborhood, swimming, watching the “Price is Right,” epic water balloon battles, going to camp, and lots of barbeques.
As this summer begins to wind down, it seems like a good time to reflect on the past again, albeit with my financial advisor hat on now instead of my little league hat.
Market fluctuations, bearish headlines, and troubling social or political events are often a source of concern and uncertainty when it comes to investing. Although they can be jarring, corrections are relatively routine in the long history of the market.
Historically, the S&P 500 has averaged a 10 percent or greater decline once every 12 months since World War II, with the average duration of such a decline being 115 days. Additionally, the average intra-year drop in the S&P 500 has been 14.1 percent since World War II, according to FactSet Research Systems Inc. via Standard & Poor’s. Fortunately, subsequent to the global recession of 2008-09, most investors have experienced a phenomenal six-and-a-half year period of positive returns (TRPG clients certainly fall into this category). In fact, the S&P 500 has only gone through a 10 percent decline one time since the market low in March of 2009 (from April 2011–September 2011). That equates to one 10 percent decline in the last 78 months, as noted by S&P 500 annual returns from Yahoo Finance.
Sell-offs happen, but they are normal. However, despite the known cyclical nature of the market, many investors become their own worst enemies during a down market. According to Dalbar Inc., a financial services market research company, the 20-year annualized S&P return was 9.85 percent, while the 20-year annualized return for the average equity mutual fund investor was only 5.19 percent–a gap of 4.66 percent.
So, why the gap? The reason investors tend to underperform is simple: bad behavior on behalf of investors. Two specific psychological phenomena happen to investors when market volatility occurs and the media begins chirping:
– Loss aversion–the fear of loss leads to a withdrawal from investing at the worst possible time (also known as “panic selling”)
– Herding–doing what everyone else is doing which can lead to “buying high and selling low”
One of the best things investors can do is to put the markets’ often-chaotic nature into a broader context. This is crucial for long-term investing success.
We continually have conversations with our clients about the paramount significance of implementing a globally diversified portfolio as well as opportunistically rebalancing, and most importantly staying the course. Granted, staying the course is much easier during bull markets than bear markets. But, investors who found the conviction to stay the course during down markets have been rewarded.
As advisors, we provide value through the planning process and in helping clients “stay the course” by managing their behavior during the most difficult times.
Obviously we cannot predict the cause of or timing of the next market downturn. But given the current sustained period of positive returns, a market decline would not be unexpected. Remember the cash balance “shock absorbers” within your portfolio are in place to protect your income from short-term volatility. Keeping your income protected allows us to treat market declines as a re-balancing opportunity.
We hope your focus remains on soaking up the last days of summer, continuing traditions, and making memories with your family, not the ups and downs of the market.
If you have any questions or comments about your portfolio or the greater historical context of the markets, please contact your advisor.
The Retirement Planning Group