June 12, 2019
The last quarter of 2018 was not very good in the US Markets. It was, in fact, the worst fourth quarter since 2008 and the worst Christmas Eve ever. And the financial media was in a frenzy. Finally, they were right. It had taken years but for once, the perma-bears were right. Hallelujah, hallelujah; their ratings were going to be great! Nouriel Roubini’s phone must have been burning up.
Just FYI, Nouriel Roubini is a Professor of Economics and International Business of Leonard N. Stern School of Business. His nickname is Dr. Doom if that gives you a clue. On March 20, 2017, he opined that the markets were “overestimating the positives of the US-Trump policies.[i]” March 2017 the S&P 500 stood at 2,378. Today the S&P opened at 2,890 (about 17% higher.) My guess is that more people have lost more money due to Dr. Doom’s predictions than anyone in the history of financial mass-media.
We all know that markets fluctuate. We’ve written about this (and footnoted numerous articles and charts) so many times that by now I hope we can at least agree that markets fluctuate. We should also be able to agree that by looking at all the easily obtainable, verifiable, and empirical evidence known to mankind (and the internet) that given enough time the markets will eventually go up! Not all stocks, but all indexes. There are, of course, individual companies in which long-term investing has not paid off. After all, creative destruction[ii] has a valuable role to play in a vibrant economy. Here, however, we generally invest our portfolios into large swaths of the markets—called asset classes and try to stay away from individual picks.
The largest and most successful businesses in history[iii] reside in the S&P 500 index. And almost all of our portfolios have some portion invested in that asset class. There are periods where our fluctuation is fluctuating in the wrong direction and we are not too happy about that. In fact, I can get quite grumpy about it. This is the price we pay for having higher returns than the risk-free investments. My quip; Risk-free is almost return-free. And if we hold our investments for the long-term we will generally ride out that negative fluctuation in the market. That may seem a bold statement but it is an easily obtainable, verifiable and empirically correct little fact. By the way, these corrections are where the most money is made even though when you’re in the middle of it you have no idea.
For the record, we do not try to time the markets, we do not predict the gyrations of the markets. We are keenly aware that the average intra-year decline of the S&P 500 is about 14%. (For precision, it’s actually 13.9% since 1980.[iv]) That’s perfectly fine if we don’t worry about it since without this volatility we would not be rewarded more than the risk-free rate.
This preamble brings me to the point of this month’s newsletter. I had a call from an investor the other day that was worried about the length of the recent expansion that dates to about March 2009. He was also worried about geopolitics but who isn’t? Investments are long-term. We need investments to create wealth and income for a long time. For example, a typical retiree leaving the workplace should plan his retirement income to fund his lifestyle for at least 25 to 30 years. To leave a legacy to the next generation we should plan for even longer periods. To do all of this, we simply need to plan, save and invest so we can retire in dignity. More importantly, we need to plan and then work the plan. Leave the investments alone and if history is any guide, we will achieve the returns we need.
Peter Lynch’s notable and quotable remark is as true today as ever, “far more money has been lost by investors trying to anticipate corrections than lost in the corrections themselves.” If we are worried that this great market can’t last, something has got to give, you’re probably right. There will no doubt be a correction or recession sometime in the future. It will happen quickly and it will not be pretty. But how do you know when? You don’t! I don’t! Nobody does. Not Roubini, not CNBC, not Warren Buffett or anyone else.
The late, and perhaps the greatest champion for retail investors, Jack Bogle, said “the idea that a bell rings to signal when to get into or out of the stock market is simply not credible. After nearly fifty years in this business, I don’t know anybody who has done it successfully and consistently. I don’t even know anybody who knows anybody who has.”
If Jack Bogle, the founder of The Vanguard Group, simply the world’s largest Fund Company, doesn’t know anyone who knows anyone who can time the market then certainly we must acknowledge that we won’t either.
We have no further to look for evidence than that fourth quarter of 2018. We lost about 20%–in a hurry. Since then, not counting dividends, reinvestments and what we may have bought during our rebalancing, we’re just about back where we started that quarter. And our long term plan is still in good shape.
Thanks for reading. MK
By the way, we’re taking off for Croatia at the end of June for a vacation. Jenna Joswick and Kristen Owen will be available for any emergencies that might crop up.
[i] https://www.rt.com/business/381368-roubini-trump-global-economy/
[ii] https://www.investopedia.com/terms/c/creativedestruction.asp
[iii] http://blog.yondo.com/a-brief-history-of-the-worlds-most-successful-businesses/
[iv] J.P. Morgan Asset Management, Pg. 14 Guide to the Markets 1rst Quarter, 2019
