It seems the market continues to get our attention as it rises and falls in a random rhythm. Seasoned investors rise the waves with confidence - this territory is not unfamiliar. But still sometimes it can be unnerving to see such volatility in a market when it is where our future lies. How do we stay up when the market is down?
A little research at what economists are saying reveals that earnings in the 1st quarter of 2018 are strong and should lead to a stock rebound coupled with benefits of recent tax reform. Research also informs us that the current volatility was expected. There is comfort in that prediction because the same voice also predicts a rebound.
A History Lesson
We can quickly forget former gains when we see what appears to be a substantial loss, but a closer look at our personal investment history as well as the overall history of the market informs us to maintain our stance.
Last year, stocks marched higher with only minor pullbacks. When the year ended, the largest peak to trough decline for the S&P 500 Index was just under 3% (St. Louis Federal Reserve data on the S&P 500). It was a year that lacked turbulence and one that rewarded diversified investors.
Since the beginning of February, volatility has returned. It’s a reminder that periods of relative tranquility don’t last forever.
So, let’s step back and gather some perspective by reviewing the data.
According to LPL Research:
- The average intra-year pullback (peak to trough) for the S&P 500 Index since 1980 has been 13.7%.
- Half of all years had a correction of at least 10%.
- Thirteen of the 19 years that experienced an official correction (10% or more) finished higher on the year.
- The average total return for the S&P 500 during a year with a correction was 7.2%.
These bullet points are an evidenced-based way of saying turbulence surfaces from time to time. Patient investors who don’t react emotionally have historically been rewarded.
Some degree of risk is inevitable. While sound recommendations are designed to minimize risk, they are also designed with your long-term goals in mind.
Savings, specific purchases, and retirement have one thing in common. They require what might be called “delayed gratification.” You must give up something today in order to achieve a specific result tomorrow.
While we can make our money work for us, i.e., compounding, savings requires choices between wants today and needs tomorrow.
Saving for the future takes discipline, but it doesn’t have to be a hard slog. Progress toward your goals creates its own sense of accomplishment and satisfaction.
A Legitimate Measure
People should be gauging based upon 1 year, 5 year, and 10 year assessments, in other words you can't judge based on day-to-day fluctuations or even month to month, but should look at performance over at least a year.
Facts versus Fiction
Basing our financial decisions on perception is more dangerous than basing it on fact. A comparison to 1 year ago reveals S&P at an 11% average earnings. So despite what seems to be a loss, it is overall still a gain compared to last year. Looking at year-to-date earnings when we are so close to the beginning of the year is not wise. It's just the end of April. And a quick survey will not produce realistic results. Better to be informed by the past and let go of fear.
While we do all we can to be wise stewards on this earth, in the end, we trust God with all He has given. He is our Provider. Being diversified and generous are two principles that God's word holds promises for. And His promises hold better returns than any gains we could ever achieve on this earth. When we are faithful with little, our God makes us faithful with much.