With the last week’s volatility in the markets I wanted to touch base with everyone.
I’d like to share a chart (Exhibit 1) from one of our strategic partners, Dimensional Fund Advisors, that puts what you are currently experiencing (What is going on in the markets!?) in perspective.
It is a bit intimidating at first glance but it really shows three simple things that illustrates how normal 5-10% declines, like the ones we’ve been experiencing, are in the stock market. They don’t feel normal because, the last several years, have had a mostly upward, steady trajectory.
- The Green bar shows the ultimate gain or loss that the market (the Russell 3000 Index) had in a given year from 1979-2017
a. So in 1998 the market ultimately went up around 25%.
b. If you had 100k Jan. 1, 1998 you had 125k on Dec. 31, 1998.
- The skinny red line shows the largest drop in the market during that year
a. For example, at some point in 1998 the market dropped around 20% (e.g. You had 100K in your account in May and in September you had 80k in your account, so you experienced a 20% drop during that five month period). These time period examples are not the actual time periods that these gains/losses occurred. They are just to provide an illustration of what a 20% loss or gain would feel like to an investor during that time period.
- The skinny black line shows the largest rise in the market during that year
a. So in that same year of 1998, at some point during the year your account gained around 30% (e.g. in January you had 100k. In March, you had 130k so you experienced a 30% gain during that period). You see similar behavior in almost every other year.
Markets moving 5%, 10%, or even 20% in one direction, up or down. Almost every year.
Yes, worries about inflation and what the Fed will do with interest rates are contributing to the current volatility.
But this is normal.
If the chart is a bit much for you to process, just think of this as one long cross country trip from NYC to San Diego (this is our long term retirement horizon). We know it will take some time to get there but we have a reliable car that has a good history of getting us to where we want to go (this is our diversified portfolio of stocks and bonds). From time to time we are going to get stuck in traffic (these are the short term downturns in our portfolio). We may even break down every now and then and have to get towed 30 miles backward (the market in 2008 or 2002).
During those periods it may seem like we are getting nowhere or that we should get out and walk or hop on a bus. As crazy as walking to San Diego from NYC sounds, that is exactly what many investors do. They make short term decisions for long term goals. This can feel great. “At least I am moving toward San Diego on my bike! You are getting towed 30 miles backward!”
But we know that getting to San Diego by car, in the long run, will be a much better choice. Just like reaching your retirement goals with a diversified portfolio is a much better choice than trying to time the market or investing in some speculative financial instrument promising great returns.
As always, I am here if you want to chat about this!
Larren C. Odom
Chastain Wealth Management CEO