Consider this statement:
“We recognize that during the past few months investors have faced increased uncertainly. Now, with the negative aspect of stock investing having been experienced, it is so important to stay invested to participate in the inevitable upside, whenever that stage begins. In a recovery, stocks bounce back and outshine the competition.”
Pretty good advice under current conditions, don’t you think?
What makes it even more significant is that I wrote it a decade ago in the middle of the financial crisis, to counteract the frenzy of market news overwhelming investors at the time. Personally, I saw little value in adding to the pile of year-end 2008 forecasts and analyses (vast majority being quite pessimistic). Breaking market news is often stale by the time you read it, forgotten soon thereafter, and irrelevant for long-term investors anyway.
The thing is, I never got to publish my entire piece. I had included several timeless points to help readers understand how vital it was (is) to keep their focus off the market’s close-up carnage and on their own financial goals. But at the time, I was part of a four-partner firm. I was outvoted 3-to-1 in favour of a piece that tilted more heavily toward “real” market commentary … aka market drivel.
Now, a decade later, I have full editorial control over my work. Some of the more timeless sections from my 2008 commentary remain as relevant as ever, so I’m pleased to share and expand on them here. They underscore my original “stay the course” statement above, plus more of what I wanted to say at the time.
Edited and expanded commentary from December 2008:
A rebound in equity markets isn’t a matter of “if,” but “when.” Remember that equity markets price in future expectations, so they tend to decline in advance of poor economic news and advance months before the economy shows any reason for optimism. As the adage goes, “Stock markets climb a wall of worry.”
In a recovery, stocks bounce back and outshine the competition. Below we show the number of years it takes to recover from a 20% loss (technically, a bear market) given different rates of return:
- At a 2% annual return, it would take 11 years.
- At a 5% annual return, it would take 4.5 years.
- At a 10% annual return, it would take 2.3 years.
A disciplined rebalancing strategy and/or a disciplined recurring saving/investing strategy shortens these timeframes.
In contrast, moving out of equities would eliminate the risk of being exposed to near-term market losses (if near-term losses actually occur), but it would NOT eliminate your risk. If you abandon your long-term plans by fleeing the market, plenty of other risks arise, including the following:
- Market-Timing Risks – Getting out during a bear market is highly likely to prolong the time your portfolio will take to recover. If you bail out during a bear market, you’re selling when prices are low. Then, when you try to guess when it’s time to get back in, you’ll probably be buying back at higher prices. You’re also likely to miss out on a good percentage of the rebound that would have been available had you stuck with your existing allocations.
- Inflation Risks– If you’re not earning expected market returns over time, your accumulated wealth is unlikely to keep pace with inflation, thus decreasing the spending power of what you have accumulated.
- Longevity Risks– You also risk outliving your savings, especially if you’re in or near retirement.
These timeless “scary market” insights should help you today. I’m willing to bet they will remain relevant a decade from now as well – and whenever we encounter the next scary market cycle, and the next one after that.
In the meantime, I don’t want to suggest I am not aware of or have nothing to say about 2018.
Like anyone else, I remain informed about the world around me. However, as in 2008, I don’t want to feed the beast of Bay Street, which feasts on our fears that we must DO SOMETHING whenever near-term markets react negatively to the news.
Instead, think of market downturns as times when stocks are on sale. As we observed back in 2008, “investors are being promised higher-than-normal expected returns for staying in the marketplace. It may take time for that promise to be realized, but if history is a guide, patience will be rewarded.”
Let me know if you could use some help remaining a patient investor. During my decades in the business, I’ve found it a much more productive activity than trying to predict exactly what to expect out of the markets in the months ahead.