The recent vote in Britain to exit the European Union is yet another reminder of how markets often react negatively to surprises. We cannot help but ask ourselves, “Is it different this time? Maybe this is the event that upends markets as we know them, and I would be stupid not to react!”
As it turned out, markets settled down quickly after this latest surprise, but it reminds us that long-term investors must endure these market downturns because no one has the crystal ball that would allow us to avoid them.
Sometimes surprises have profound and long-lasting effects. Those of us who have been saving for retirement for the past thirty years or so have seen plenty of surprises, and I think it is helpful to put some of the results in perspective. Looking back from 2016, it is interesting to note how disappointing our recent experience has been. Since 1940:
• The worst 3-year performance for the S&P 500 ended in March of 2003 (-16.09% annualized).
• The worst 5-year performance for the S&P 500 began a year later in March 2004 (-6.64% annualized).
• And the worst 15-year performance for the S&P 500 ended in August 2015 (+3.76% annualized).
In other words, the technology/dot-com bubble that ended in March 2000, and the financial crisis of 2008, were back-to-back disastrous surprises for the stock market. The fallout has consumed more than half the working career of anyone much under 50 years old, and had a negative impact on those who are older and trying to save for retirement in their peak earning years.
Another interesting fact: If we add the previous ten years to that worst 15-year period (25 years beginning in September 1990), the S&P 500 realized annualized returns of 9.8% – very close to longer-term averages.
Some conclusions we can draw from these observations:
• Time horizon matters – 15 years is not a long time for a long-term investor, and anyone planning for retirement should be a long-term investor.
• It’s different every time – the cause of the surprise is almost always different than the last time markets were shaken, but long-term investors must be ready to endure the inevitable downturn.
• The best reaction is almost always the same – check your risk profile to be sure it is appropriate for your situation, then rebalance to your targets, buying stocks at discounted prices.
• Staying the course makes sense – the major market run-up in the 1990’s was as unforeseeable as the subsequent downturns.
Events like the Brexit vote test our patience and tolerance for risk. Maintaining a long view to the future, and keeping history in perspective, can help us make better investment decisions.
Other articles filed under Investing
November 22, 2017
Let’s continue our alphabetic tour of common behavioral biases that distract otherwise rational investors from making best choices about their wealth. This week, we’ll tackle: fear, framing, greed and herd mentality. FEAR What is it? You know what fear is,...
November 16, 2017
Welcome back to our “ABCs of Behavioral Biases.” Today, we’ll get started by introducing you to four self-inflicted biases that knock a number of investors off-course: anchoring, blind spot, confirmation and familiarity bias. ANCHORING BIAS What is it? Anchoring bias occurs...
November 7, 2017
By now, you’ve probably heard the news: Your own behavioral biases are often the greatest threat to your financial well-being. As investors, we leap before we look. We stay when we should go. We cringe at the very risks that...
October 23, 2017
Stock Markets Equity market returns over several periods ending September 30, 2017 are shown on the graph to the right. Here are a few highlights: Stocks provided above-average returns over the past quarter – REITs lagged. Non-domestic markets led the...
October 20, 2017
On August 2, 2017, the Dow Jones Industrial Average set a record, closing above 22,000 for the first time. People will debate the cause of the rally and how long it will last, but there is only one answer that...