Investors pay a premium for the illusion of predictability.”

– Jason Zweig – Author
(Your Money & Your Brain)

One of our favorite phrases around here is “markets go up and down, not up and up.” This simple sentence captures the essence of the investment experience without any pretense. The past three years have witnessed the U.S. stock market making up most of the decline from the late 2008 – early 2009 period. Since we are now familiar with the “up” portion, let’s look at the inevitable “down” segment.

We know from market history that market values decline regularly. Intra year declines of 15% or more happen about every third year. More substantial, “bear market” declines happen about every 5 years on average. The exact timing of these larger pullbacks is unknown, of course, but they usually last about 1 year and average about 30% from the peak. That sounds unsettling, however the context is that these declines have always proven temporary while the ensuing increases become permanent.

Those who have been in for review planning meetings recently will recall that we have been writing the value of the S&P 500 in your birth year on the white board followed by the current value. In many instances the S&P has increased by 60-80 times during that period. The starkness of these numbers tells the whole story.

Investors often let their emotions control financial decisions and this usually translates into running from the market in these inevitable periods of temporary decline. The most recent correction in 2008 was testimony to this and many investors are still out of the market, having now missed 3 years of sizeable gains.

The reason we invest, after all, is to maintain long-term purchasing power. Money is purchasing power. This is difficult if not impossible without some exposure to the stock market. The best way to rehearse for what surely will come is to understand that volatility is not loss. What we have discussed here is volatility or temporary price fluctuation. Long-term equity returns are directly a function of this volatility. Without the volatility, the premium returns don’t exist.

We assist clients with maintaining discipline and focus. Our approach is evidence-based, transparent, and un-conflicted.

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