The great Warren Buffet once taught us a very valuable lesson.
We can conceptualize the market as an individual named ‘Mr. Market’. He is your partner in a business, and he is a bit of an emotional wreck. Without fail, every single day, he shows up at your desk with a price where he is willing to either buy your interest in the business or sell you his interest in the business. He is always swinging between euphoria and depression, so he sometimes offers prices that are irrational.
You’re the steadfast one in this partnership, so it’s important that you keep your wits about you when navigating this daily conversation with Mr. Market. If you have an accurate idea of the value of the business that you own, you can buy shares from Mr. Market when he is in a depressed mood (Offering a discounted price), and you can sell shares to him when he’s in an ecstatic mood (Offering a very high price). But you are never forced to buy or sell to him.
The point of this lesson is that we need to make the best decisions for ourselves, regardless of what everyone else is doing.
Market Growth Amid Global Challenges
The chart below shows about 60 significant world events of the past 55 years. Nearly every year, there were things to potentially worry about. Through all that, the market still gained nearly 11% on average per year. Some years were better than others. Generally, every downturn was followed by an upswing.
The market has been resilient despite political issues, wars, technological breakthroughs, financial collapses, and tragedies.
Historically, the longer you’ve stayed invested, the higher your odds were of achieving a positive return.
The Market’s Rebound
This chart below shows the 15 largest single day percentage losses in the S&P500 since 1960, and the subsequent price performance of the index for the periods that followed. The dark orange bars tell us how well the market performed for the following year starting on the biggest day declines. So those days have been great buying opportunities! Not the time to sell.
This graphic below shows the ending value of the S&P500 after each year in blue, and the biggest downturn of that year in orange.
Every single year of the past 45 years, the market was down at some point. The market ended down from where it started the year in 10 of those years. The market ended flat in 1 of those years. And in 34 of those years, the market ended the year higher than where it started the year. Some specific years were more volatile than others.
- In 1998, a portfolio with $1M invested in the S&P500 swung down to $810k, but finished the year up to $1.27M.
- In 2009, a portfolio with $1M invested in the S&P500 swung down to $720k, but finished the year up to $1.23M.
- In 2020, a portfolio with $1M invested in the S&P500 swung down to $660k, but finished the year up to $1.16M.
The difference between discipline and panic in these cases could result in a potential difference of half a million dollars. (Even potentially more than that for the people that were willing and able to buy more as the market fell)
This graphic below shows the magnitude, frequency, and length of various declines that have occurred in the S&P500 since 1942.
Navigating Market Volatility
If the last 80 years are a reliable guide, then we can expect 20%+ downturns to occur about every 5.5 years, downturns in the range of 15-19.99% about every 3 years, 10%-14.99% downturns about every 16 months, and downturns in the range of 5%-9.99% about 3 times per year.
Mr. Market is always available to make us offers, but we always have the final say.
If fluctuations in your investments have caused you major stress, impacted your sleep, your mental health, or your relationships, then you are likely OVER-invested in the market. It may make sense to further diversify, increase your allocation to uncorrelated assets, and/or increase your cash and bond positions.
Data provided in this blog was provided from the ‘First Trust Client Resource Kit – Markets in Perspective’ – www.ftportfolios.com
RSVP For Coffee With Riverbend Event
On the lighter side we are having a webinar on August 13th from 9:30 am – 11:00 am that is now open for you to RSVP. The topics to be covered by Jeremy Finger and John Nichol will be a general market overview, a recap of the 2nd quarter earnings season, the Federal Reserve’s upcoming decisions, politics, and any questions you may have.
Hope all is well with your family,
Jeremy
Finger Financial Five – 5 points in 5 minutes or less – is to provide you with a weekly shot of useful financial information. My intention is to share principles so that you will have more clarity that help you make better financial decisions.
The information presented in this newsletter is the opinion of the writer and does not reflect the view of any other person or entity. The information provided is believed to be from reliable sources, but no liability is accepted for any inaccuracies. This is for information purposes only and should not be construed as an investment recommendation.
Past performance is not necessarily indicative of future results, and there is no assurance that the investment objective will be achieved or that the strategies employed will be successful. All investments involve risk and, unless otherwise stated, are not guaranteed.
The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.
