Author: Marty Moore, CFP®
Does last year feel like it was an eternity ago? For me, last year feels like it was 6 years ago, not 6 months ago.
A lot has happened in the first half of this year. (Candidate for understatement of the year.)
If you dropped into a deep sleep on New Year’s Day and took a mini-Rip Van Winkle-like nap, then woke up today to see where the stock market was, you’d think it had been a rather ho-hum year so far. For the first 6 months of 2020, the stock market (S&P 500) was down 3.9% (source: Morningstar, Inc.). Not good, but hardly a decline that would prompt an emotional ripple from most investors.
Yet, here we are, having experienced tidal wave after tidal wave of emotional ups and downs. The pandemic, stock market collapse, shut down of the economy, unprecedented unemployment, improving COVID numbers, huge market recovery, slow reopening of the economy and a small step toward life returning to normal. Now it seems the virus stats are worsening, at least in the number of cases if not the number of deaths.
It was the worst of times; it was the best of times…
Admittedly, this is a terrible twist of Dickens’ classic novel, A Tale of Two Cities. But, for the market in the first half of the year, it’s also true.
Here is a chart of the best and worst quarterly periods in stock market history.
What’s even more remarkable than what the chart shows is that the 20.5% return in the second quarter came not off the heels of the 19.6% decline in the first quarter. It came after the market continued to fall in early April all the way to being down 33.8% from its high point on February 19th. Down almost 34%, then up over 39% to finish the first half of the year down just over 3%. Crazy. (source: Morningstar, Inc.)
“Ninety-five percent of financial history happens within two standard deviations of normal, and everything interesting happens outside of two standard deviations.”
- Private equity investor Richard Kayne
I have long forgotten most of what I learned in Algebra II, but I’m sure the first half of 2020 will fall far outside of two standard deviations of normal.
“But wait… there’s more!”
For icing on the cake, in the first quarter there were three days the market fell 7% or more. 7% in a day! These three days fall within the worst 25 daily declines in history. Amazingly, two of the best days in market history also happened in the first quarter. March 13 and March 24 each producing a market return of over 9%. (source: Returns 2.0)
I don’t present these stats in order to elicit another emotional tidal wave. Rather, I find it remarkable that across the board our clients held firm with their investment plans, maintaining course in the toughest of market environments. For this, you are to be commended.
We all know we can’t time the market (don’t we all wish we had a dollar every time we heard that, right?). But to hold steady and allow intellect to overcome emotion during a time like this is admirable.
It’s often said that 90% of life is just showing up on time. I think we can also say that 90% of investing is temperament and patience.
As Wall Street Journal columnist Jason Zweig said recently: “The first half of 2020 should remind us that investing isn’t about conquering markets; it’s about mastering ourselves.”
More investment challenges…
There are plenty of investment options besides stocks. Bonds, real estate, commodities and cash options are all major investment classes that most people include in their portfolio. Do you need to invest in all of these options? Can any one of them be eliminated… like stocks!?
Yes, you can eliminate stocks or any of these options. It may, or may not, be a good idea though. Real estate and commodities can be volatile and can go through long periods of poor performance. Bonds, while more conservative, have done a poor job at earning a return that keeps up with inflation.
Which brings us to cash; things like savings accounts, money market funds and CD’s.
Income Earned on $100,000 in a Savings Account:
Look at the early years on the graph, 1994 – 2007. Most of these years earnings on savings accounts outpaced the cost of living. An ultra-conservative investor could have most, or even all, of their money in a principal guaranteed instrument while maintaining their purchasing power.
Boy, did things change quickly though. Interest rates dropped so precipitously after the financial crisis that over the ensuing years savers have earned such paltry amounts they quickly fell behind, not just the general rate of inflation but even more so the rapidly rising cost of health care and college education.
Stocks, over the long run, have been the most consistent investment class that has provided a “real” return – a return that outpaces the rising cost of living.
IF INTEREST RATES ARE SO LOW, WHY ARE CREDIT CARD RATES SO HIGH (STILL)?
Financial advisor Ben Carlson addressed this issue in a recent article, citing the possible reasons:
- Lending standards are much lower for credit cards
- The loans are unsecured
- Consumers have all the power in terms of when and how to use their allotted credit
- There is a higher chance of delinquency in credit cards than other loans
All these reasons are probably true, but they don’t tell the whole story. To read more about why rates are still so high, which includes an interesting section on Bank of America’s role in the early days of credit cards, click on the link: (short article, probably no more than 3 minutes)
Interestingly, South Dakota ranks 33rd among states on median income, but is tied for second based on average credit score. Meanwhile, the District of Columbia has the country’s highest incomes, but ranks 32nd on credit scores. (source: CreditCards.com)
IN THE END…
The Coronavirus is getting to us all. Even this 4-year old is having a tough time.
Some are looking for a big comeback the second half of this year.
And when we come together in ways like this, anything is possible.
As always, thanks for reading.
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