Author: Marty Moore, CFP
A look back at the last couple of years
Not to bring up the unpleasant but … do you remember what happened in the stock market a little over one year ago, Christmas Eve 2018? The Dow Jones Industrial Average closed at 21,792, down from 26,828 less than 3 months prior on October 3rd, a decline of -19.1%.
As of today, January 13th 2020, the Dow is back up to 28, 877, an increase of 32% in just a little over one year. (source: Yahoo price quotes)
From 26,828 to 21,792 back to 28,877. Raise your hand if you saw that coming.
2019 was a good year in the market, obviously. 2018, however, was not. The U.S market (S&P 500) was down -4.8%, even more in foreign markets. (source: Standard & Poor’s; total return)
Typical ups and downs in the market. That’s just the way it goes.
2018 is the price we pay for 2019 – the pain endured (emotionally and psychologically).
The two-year average return of almost 12% per year is good (above average, to be sure) but that’s just point A to point B. It tells us nothing about the road traveled. Down -4.8% in 2018 then up 31.3% in 2019 (S&P 500). More like roller coaster ridden than a rode traveled. (source: Standard & Poor’s; total return)
… that’s just the way it goes. (For a potentially smarter sounding, but no better explanation, tune into CNBC any day of the week.)
A longer look back
Let’s take a quick look at the last ten years, 2010-2019. The S&P was up on average 13.6% per year. But… not to bring up the unpleasant, again… we had to deal with:
A paralyzing financial crisis, deep recession, escalating unemployment, first ever downgrade of US government debt, Greek debt crisis, a government shutdown, two major hurricanes that cost insurers billions, Brexit, and a host of geopolitical concerns including military provocations from North Korea, and an ongoing trade and tariff war with China. And now we’re dealing with the impeachment of the president.
These events are the kind of things that unnerves the financial markets and causes market volatility. Over the past 10 years we’ve had market declines of -5% or more thirteen times. (Doing the math that’s at least once per year on average.) Two times the decline was nearly -20%. (-19.4% in 2011 and -19.8% in 2018. Source: Yahoo finance)
Still, business goes on and the market was up 13.6% over this period. Again, raise your hand if you remember anyone at the end of 2009 (at a time when we’re just collecting our breath from the financial crisis) predicting a stock market return in double digits over the coming decade.
Day-to-day volatility normal. General upward trend over the long-term also normal.
So why do we even bother?
Why even get on the roller coaster in the first place? After all, the lazy river is right next door.
The lazy river offers a nice, pleasant, almost serene ride. You can close your eyes and cast your worries to wind. On this ride you can earn a very safe, and with some options, even a guaranteed return. But… as we come to the end of the ride we find out that our safe, maybe guaranteed return, has also been fairly serene. We might even find that our now only slightly larger account can’t even buy the new, inflation-adjusted ticket price on the lazy river!
Allocating some portion of your investment dollars for growth and investing in stocks in order to earn a return that will outpace the cost of living involves a bit of unpleasantness from time-to-time (routinely, really). It’s never a calm, gentle lazy river ride.
(Side note: We often say ‘investing in stocks’. It’s a term I’m not particularly fond of. It is, I suppose, a quick and easy way to say: buying an ownership stake in a diversified portfolio of some of the best run, most profitable companies in the world.)
The look ahead
A few weeks ago at a friend’s Christmas holiday party I was asked the question of what I thought the market was going to do next year (2020). As a financial advisor, shouldn’t I at least have an opinion, if not professional insight?
I get this question often, especially at the beginning of a new year. I have usually tried to at least offer some reasonable thoughts and opinion about the current state of the market.
Now, I try not to sound flippant, but I usually just say: I really don’t have much of an opinion and may only have a slightly better insight than the average person. I do know, however, that it usually makes sense for most people to own shares in well-run, profitable companies and hold for the long-term.
The conversation usually then quickly shifts to the topic of the weather.
I do hope, like most investors would hope, that the (stock market) weather in 2020 will be mild and sunny throughout the year; not too hot, not too cold, and bringing just the right amount of gentle rain.
Raise your hand if you think this is the way it will go. Slim chance, right? And please call me if you hear this outlook on any of the financial news shows over the coming weeks. Most pundits will be calling for severe storms, just as many were doing this time last year. Oops.
I do wish you personally, however, that 2020 brings peace, prosperity and a year filled with good times with family and friends.
As always, thanks for reading.