It Was Never A Straight Line
I feel anxious and nervous today. I am sure you do too. The news is bleak. Innocent humans are suffering. It’s not one of humanity’s best moments.
When the COVID crisis started I found it hard to know what to write – everything seemed trite and insensitive. I feel like that again today. We are so fortunate to have a portfolio to worry about, and for that to be on our minds today. Those living in the Ukraine don’t have that luxury. For us, this too shall pass, for them…...
Our emotions and compassion for the people whose lives are being impacted (and lost) feels at odds with our anxiety around what is happening in the markets - I am not entirely sure how we go from one to the other. I am not sure we SHOULD go from one to the other.
But, my job is managing people’s money and what that really means is that I manage people and their behaviour. And the start of a war is certainly a time when our behaviour could let us down.
So, let me remind you once again of the rules.
A market correction occurs when prices fall 10%. The S&P 500 has had a correction roughly once a year. Corrections are a feature not a bug.
It doesn’t feel good, but it’s normal.
Stocks never went up in a straight line.
There is no upside without downside.
We earn our permanent long-term return by riding out the temporary downs.
We are long-term patient investors and we never react to current events.
Our lifetime success as an equity investor depends on our ability to continue to act on a plan. Failure comes from abandoning our plan and reacting to the market movements.
The best thing we can do when things get scary is nothing. Doing nothing is a decision. My job is to help you do nothing when doing nothing is the right thing to do.*
Those are the words.
Here’s the data:
Most corrections do not end up in a full-blown bear market (this might, I don’t know), and although the duration of a stock market correction varies, most last less than four months.
More importantly, the correction sets the stage for a rebound and Ryan Detrick notes that the average one-year return following a correction is almost 25%.
I know what you are thinking….but this is a war, Georgie. Can’t you see that this is different?
It is always different, but it’s never different.
Here’s the truth. It sounds terrible but stocks don’t react badly to war, at least once the initial impact is over (the stock market does not have feelings). Ben Carlson explains the relationship between war and the stock market here.
He writes:
“Hitler invaded Poland on September 1, 1939, setting off the war. When the market opened on September 5, the Dow shot almost 10% higher that day. When the attack on the U.S. naval base at Pearl Harbor occurred in early December 1941, stocks opened up the following Monday down 2.9%, but it took just a month to regain those losses. When the allied forces invaded France on D-Day on June 6, 1944, the stock market barely noticed. The Dow rose more than 5% over the ensuing month.”
The DOW rose 50% between the start and the end of the second world war – a rise of 7% per year.
During the Vietnam war the stock market rose 43%, or just under 5% per year.
When the US invaded Iraq in March 2003 stocks rose 2.3% the next day and ended the year up 30%.
It’s absolutely impossible to know what will happen this time, but let’s not bet on the end of the world.
Stay focused on the long-term, stay focused on your plan. Your portfolio is not there for tomorrow, it’s there to fund your long-term dreams and goals.
If you feel your level of anxiety increasing the best thing you can do is turn off the news. Get outside, find some nature. Hug someone you love. Try not to look at your investment portfolio. I’ll let you know when it’s safe to look again. And please know, if you need to talk it through - I am here. This is exactly what I am here for.
*That being said, if you have excess cash in the bank, I would see this as an opportunity to buy stocks whilst they have gone on sale. I will be doing exactly that today or tomorrow.
Georgie
georgie@libertywealth.ky