Mind the Gap

As regards the stock market, at a time when everyone seems to be wondering ‘When will the other shoe drop?’, I want to add some helpful perspective.

How are your grandkids?  Were your Holidays fulfilling?

Which is to say, who cares about the other shoe when the utter foolishness of predictions seem to be well established?  Concentrate on the things you can control.  You cannot control the market (never can, never will).  You can control emotions (the predominant ones being faith, discipline, patience), asset allocation, diversification and rebalancing.  Those factors are THE ONES that control how well you will do as investors.  Period.  You must believe this at a guttural and intellectual level or you will never be a successful investor.  we could repeat the above two lines 50 times and it would not be enough.  we do, it is what all the research data supports, and it is exactly how your portfolio is invested and managed.

Oh, perhaps you are saying, did I happen to notice your primary equity component in your portfolio (the US Core Equity II) was  up 37.76% for the year 2013?  Further, would I agree that since the times of Galileo objects that go up must go down?  Well to the former question, yes, frankly, I am quite aware of the S&P 500 index increasing 31.9% in 2013.  But no, we do not believe that every increase in the market must be matched by an equal and opposite decrease.   I don’t believe it because there long term evidence only supports the polar opposite.  And that is the operative point for this message.

Take a look at the above graph.  It is a fresh look at the quotidian nature of short-term volatility, revealing as it does that the average intra-year decline in the S&P 500 on a closing basis is 14.7%

Despite this –indeed despite the two largest bear markets since 1929-1932– you’ll note the S&P Index (ignoring dividends) has provided positive returns in 25 of the intervening 33 years.  You simply do not end up at the same place (what goes up must go down) when 75% of the time that does not happen.  Voila.  Your portfolio should have an upward projection over the long term for this very same reason.  It’s not magic; it’s the absence of magic.  It’s investing.

NOTE; to interject some further reality, the developed international stock markets did about half as well as the USA in 2013, and emerging markets were fundamentally flat.  Therefore, all things being equal, we’ll probably sell off a little of the US over the next year and buy a little of the foreign stuff.  You know, buy low, sell high, and other not-so-complicated advice that your grandfather would have given you.  There’s no use in being greedy.