February 7, 2018
As I write this on February 5, 2018, the Dow Jones Industrial average lost 1175 points, wiping out all gains year-to-date.
Here’s advice you might not find elsewhere.
Yawn.
The financial media loves to create panic and anxiety by focusing on the aggregate wealth that is “wiped out” when the market declines. It’s hogwash.
If you do nothing, your gains are unrealized. Your losses are on paper only. You only get “wiped out” if you sell.
Assume you are 40. Why do you care about the value of your 401(k) today? Presumably, you won’t access it for another 19.5 years. Shouldn’t your focus be on its value at that time?
Since 1929, we have had 14 recessions. Nine of them have occurred since 1957. During those nine recessions, stocks dropped by as much as 35% (during the recession from December 2007 to June 2009).
How long did it take stocks to recover from those losses? As Ben Carlson noted in this blog, “[T]hree years out from a recession the annual returns showed an average annual gain of 11.9%. Five years out the average annual gain was 12.3%. Only one time since 1957 was the stock market down a year later following a recession, which occurred during the 2000-2002 bear market.”
Yes, stocks typically decline during a recession. But here’s what the financial media won’t tell you. They also often recover rapidly, with above average performance for the years following the recession.
Investors who didn’t panic weren’t “wiped out.” They profited handsomely.
Of course, no one can predict if this is the start of a prolonged market decline or only a temporary setback. We also don’t know whether the past behavior of the stocks will continue in the future.
We do know that intelligent, responsible investors have a plan and stick to it through all markets. The key to this plan is the right asset allocation (the division of your portfolio between stocks and bonds), which permits you to weather the volatility of the market.
Smart investors focus on things they can control, like investing in a globally diversified portfolio of low management fee index funds, deferring or eliminating taxes and keeping costs and fees to a minimum.
Much of the financial media is a source of misinformation, replete with predictions about the direction of the market and other crystal ball gazing, all of which is harmful to investors. Commentators like Jim Cramer and most of the pundits on CNBC should be avoided at all times, but especially in times of extreme market volatility.
There are a number of reputable financial journalists. I encourage you to seek out their advice. Here’s a partial list:
You won’t see these journalists banging their shoes on the table. They are a valuable resource for sound, academically -based investment advice, in all markets.
You now have a strategy. If the markets continue to decline, just yawn.
I recommend this blog post by Ben Carlson. He puts recessions in context.
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