Sent June 2022
We often are preached to by so-called experts regaling the “best investment moves we can make.” Those suggested moves are commonly proactive aspects of investing or finance: finding that right investment, or that “gem of a company that no one has discovered yet.” Beyond the simple reality that these “hot buys” don’t work out so hot. Consider this: the market is down 17% year-to-date, but that really looks good compared to the big data recent IPO company Palantir which is down 58%, or hot exercise bike company Peloton who is down 62%, or video streaming Netflix which is off 70%. You’d be truly surprised at how much an individual investor’s financial success doesn’t come from doing the right thing, but frankly comes from not doing the dumb thing. It turns out that not doing dumb things is pretty bright.
What’s one of the dumbest things people can do? Pulling money out of a down market.
I’ve assembled a list of the eleven (11) dumbest mistakes people can make financially. Selling when things are down is down is one of them. It’s hard not to want to sell because we want to stop the pain, but it’s unwise. What people don’t’ fully understand is WHY that is dumb. For your intellectual benefit, which will also help to offset your emotional angst, below I give you the four reasons why persevering through a down market is necessary if you want to succeed financially.
Reasons to Persevere in a Down Market
1. The Market is Unpredictable
First, just understand that nobody knows where the market is going to go next. Literally. All the top investment people will tell you the same thing. The USA stock market goes down on 46% of all days, so going down isn’t surprising or hard. What’s hard is when markets go down week after week, and the Dow Industrial’s seven weeks-slump is the longest it’s had since 2001[i]. However, we all know stocks have better returns than bonds and we need to be in them, so getting out begs the question; “When do you go back in?”.
The Global Head Of Research at Dimensional Fund Advisors is Savina Rizova, and I’ve had the good fortune of participating in a few of her private lectures. (To know her a bit you might enjoy this link, and she references Dr. Ken French, whose investment research is also part of Wellspring clients’ portfolios.) Nonetheless, she assembled some helpful data recently and noted that the long-term returns we see occurring in equity markets, often times had their biggest daily returns during even long downward periods.
Returns in an Unpredictable Market
Dimensional looked at the S&P 500 from Jan. 1, 1990, through December 2020. It found that $1,000 invested in the index produced these returns[ii]:
- $20,451 if you were fully invested for the entire period.
- $18,329, if you missed the best single day over those 31 years, a gain of 11.6 percent on Oct. 13, 2008.
- $12,917, if you missed the best five days.
- $7,080, if you missed the best 15 days.
- $4,376, if you missed the best 25 days.
Thus, timing is tough to get right and keep in mind, it’s only random luck if you did.
2. Get Rewarded For Your Risk
The second reason you want to stay in markets when things are dicey is because in high finance parlance those investors must get better returns. One of the fundamental tenants of investing is the formula Risk = Return. Stock market exchanges around the work are down and people are nervous, which is what forced stock prices down in the first place. Thus, until and unless the world comes to an end – in which case you would have a far bigger problem than your portfolio – investing when markets are down embraces the fact the future expected returns of stocks are higher. You are getting rewarded for your risk.
3. The Pressure of Capitalism
The third reason is simply logic, but it’s logic against greed. We know companies in the private markets have to make money (as opposed to the USA government, which can run deficits because they have the power to tax). Thus, the relentless pressure of capitalism forces these companies to innovate, to adapt to changing times and competitive pressures they face so that they would succeed in their own, and their shareholders’, best interests. Since 1926 to the end of last year, the annualized return of the S&P 500 is 10.5%[iii] — which includes every down-market period you can recall in your life, much less the life of your grandparents. So, in being tempted to get out of the equity markets, even if we COULD do it (kindly dispelled above), we are saying we want more than that wonderful and unbelievable steady 10.5% return. That’s a tad heady for me and yet the inevitable conclusion of what must be sought by those want to get out.
4. Inflation
Lastly, and fourth, beyond the above threesome reasons which always and everywhere prevail, is the current circumstance of the greatest inflation we have seen in 39-years[iv]. Where they can, companies raise prices to combat inflation, which is why your grocery bills are up. The shake-out of which companies can make these changes, and which cannot, causes much of the turmoil in the markets. But make no mistake about it, stocks have been one of the best protections against inflation for investors because of that adaptability. If you are in stocks during periods of inflation, you have a chance of overcoming the negative aspects you see at the grocery store with the returns provided by stocks.
Making Wise Investment Choices
Investing well is hard. If it were easy, everyone would do it. We can’t control whether markets go up or down, but we can control how we act toward those changes. And it is in that regimen, those actions, where financial success is born.
It remains my deep and distinct honor to serve you.
Patrick Zumbusch
Founder and CEO
Wellspring Financial Partners
[i] “Warren Buffett, Jack Bogle and Financial Planners Agree: When stocks are down, don’t watch the market closely” (Nicolas Vega, CNBC.com, May 17, 2022)
[ii] “Stocks Have Been Falling. I’m Still Buying Steadily” (Jeff Sommer, New York Times, May 19, 2022)
[iii] Matrix Book 2022 (US Dollar returns, Dimensional Fund Advisors)
[iv] “This Is The Worst Inflation In Nearly 40 Years. But It Was So Much Worse Back Then” (Chris Isadore, CNN Business, January 12, 2022)
