Market Commentary 9/9/2015
"Your letter to your investors reminded [me] why I have a Jeff in my life so I don't have to look at the numbers constantly and discern what is true and what is noise. And yes I remained calm because I have a guy whose job it is to watch, think, advise, repeat."
by Jeffory L. Stukey, MBA, CFP®
Most of us experience a lot of "noise" regarding the market and investing in general. Noise is information that is not really useful or helpful. Here is my commentary on the "noise" I have been hearing lately ….
There have been eleven bear markets (see chart below) since World War II. (A bear market is commonly defined as a drop in the domestic stock market of at least 20% for at least two months.) The last bear market was from October 2007 through March 2009 and is sometimes referred to as the Great Recession, during which the market dropped by 57% and was the worst since the Great Depression.
Since the low point of the Great Recession in March 2009, the market high was 2,131 on May 21, 2015. The market low since May 21st was 1,868 on August 25, 2015, which is a drop of 12%. This recent drop in the market is considered a "correction." And, although the recent volatility has been somewhat rattling to the nerves, it has not yet entered into bear-market territory.
There have been eleven bull markets (see chart below) since World War II. The current bull market has lasted for 6.2 years to-date, which makes it the third longest and at a 215% increase, it is the fourth largest. The average bull market is 5.1 years. So, in terms of averages, we are overdue for a bear market.
"Thanks for including me in your distribution list. This is a really good commentary. I know I feel better. So it is that feelings follow facts."
San Diego, Calif.
- When listening to TV news or reading your favorite blog/magazine, keep in mind that the media is selling advertising. Every time we have a correction, the tendency in the media is to make it sound like it is the end of life as we know it and that "this time is different."
- "This time is different," makes for a good sound bite. However, in the past 70 years, the trend of the market has been upward. Notice that the "High Price" for each and every bull market is greater than ever before.
- We are overdue for another bear market if you look at the historical averages. (Of course, there have been two bull markets greater than nine years, which would give us another three years or so.) However, no one can consistently predict the future. And, even if someone could get it right once, he would have to be right twice; the first time to know when to get out and the second time to know when to get back in. The research is conclusive: over the long haul, trying to time the market is a losing proposition.
- Bear markets are part of healthy free-market, capitalism at work in a democratic society. Without bear market corrections, we would experience much worse outcomes over the long haul. Just take a look around the world at other economies that have adopted other approaches.
So, what are we to do? I believe we should spend our time and energy on the things we can mostly control:
- Belief in free-market capitalism operating in a democratic society. It is not a perfect system, but it is the best option available. Historically, over the long haul, our system has consistently created a steady growth of wealth.
- Planning for the future (in contrast to being depressed about the past and/or being anxious about the future). Develop a sound financial plan, implement it, monitor it, and make corrections along the way.
- Discipline in: spending, saving, investing, retirement plan contributions, and life-style choices. And, discipline in sticking with one's investment plan, even during a bear market … especially during a bear market.
- Ensuring a proper asset allocation between stocks, bonds and cash. According to the research, this is the number one determinant of long-term returns.
- Diversification in the stocks and bonds of a broad array of companies worldwide.
- Minimizing investment expenses and complexity.
- Choosing investment vehicles that are transparent; transparency helps to prevent the corruption that inevitably occurs when a select few have access to important information, allowing them to use it for personal gain.
- Annual portfolio rebalancing to match current risk tolerance and time horizon.
We have no control over the state of the economy, value of the stock market, tax rates, interest rate, inflation, governmental regulation or the future. And, chasing short-term market performance, trying to guess what the next "hot" investment will be or trying to "time" the market are losing strategies and have almost nothing to do with what I do for my clients.
Noise is the constant drumbeat of superfluous information that we are subjected to daily. I believe that one of the keys to success, both in finances and in life, is to filter the noise in our lives, both in the media and in the culture. Instead of focusing on the noise, we are better served by focusing on the things we have control over and our odds for success, both in finances and in life, will likely increase. I believe that a goal-focused, financial-planning-driven portfolio, steered by patience, discipline and rational faith in the future, is the most reasonable approach to achieving superior, long-term, real-life returns.
Don't get me wrong … I am concerned about participating in the next bear market and the associated emotional stress and paper losses of say 20% or 30%. However, I am more concerned and focused on staying in the market so that I don't miss out on the potential 200% or 250% increase in the next bull market.