As we were initially drafting this article in late May 2012, we was referencing the markets falling off from its first quarter 2012 peak. Now, as of this June 1, 2012 writing, we observe the market dropping another 250-300 points mid-day and thought about revising the message.
But we’re not. The message is the exact same.
Three main points;
- Markets go up and they go down. They roared up in the 4th quarter 2011 and 1st quarter 2012 (between 20-35%, on average) and now are down (10-15%, on average). It is this volatility that is common. More than that, it is this volatility that you have to endure to get the extra roughly 4-10% return that the equity markets commonly return over the fixed income investments over extended periods of time.
- Nobody experiences a loss in these circumstances. They do experience volatility. If they sell due to volatility, then and only then do they experience a loss.
The reason this point is so important is because investors almost always do the opposite. A national firm by the name of DALBAR has computed this behavioral malady for each year over the last 20 years. Without exact numbers quoted, the gist of the study is that the average large cap mutual fund has grown by 9% per year, but the average investor IN THOSE SAME FUNDS has realized only a 3% growth. These investors (which are most investors) act on emotion rather than wisdom and get killed.
- The last point is that over this same April – May, 2012 period we have seen 10-year Treasuries moving to their lowest yield since WWII (1.74%). Investors in equities get scared, because they’ve been scarred, and instinctively move to what they think is ‘safe’. One problem; it’s not.
Behind all of these daily / monthly emotions we must never forget the tireless march of inflation. If inflation is 3% per year, and you’re earning 2%, how’s that working for you? You need to protect your living standard and options for the future and staying ahead of inflation means a well-diversified portfolio. Stocks are part of that diversification.
As we’ve often said, investing isn’t just intellectually hard, it’s emotionally hard. Yet calling out the facts allows us to address the emotions and get them under control.
Be wise, be emotionally steady, and prosper. Good days will come again and you will be wealthier because you did.
