Owning equities in 2017 has once again proven its value to our financial health. As of December 11, the S&P 500 sits in the neighborhood of 2,657 and, not even counting dividends, has returned about 18.7% for the year. Now, just to keep compliance content and happy, we need to note that none of us can invest in the S&P 500 directly, it is an index. Furthermore, we want our investments to be diversified so we would not invest in only the top 500 companies in the USA.
While we want diversification we will always want a sizable portion of our investments in equities. By the way, when we say equities we are referring to shares or pieces of ownership in public companies. And we want to own our part of these companies so we can participate in their success. Ownership of the top 500 companies (S&P 500) has returned a very nice 8.5% average since 1980. (J.P. Morgan’s “Guide to the Markets” Sept. 30, 2017.)
That we participate in their success is true. It is also true that we participate in their failures. “It will fluctuate my boy, it will fluctuate,” said Mr. J.P. Morgan when asked by his lift operator what the market will do. Because of that fluctuation, we are afforded greater rewards for our investments. Being an owner rather than a loaner requires us to suffer the slings and arrows of the market-place for a better reward. Loaners to companies get paid very little compared to the owners of companies because rarely do loaners lie awake at night in a pool of sweat thinking about their last quarterly statement.
But, in the end, do we really need to lose sleep over those lousy quarterly statements when we know, deep in our logical & rational parts of our brains that in time we will be much better off owning companies. Companies that create and innovate new products and services then sell them for a profit in a consensual exchange where both parties win. Companies that then disperse those profits proportionately to their shareholders. Sure there is business risk, market risk, economic risk and social, political and legislative risk associated with equities. However, if history has any educational value at all we can see that free-markets have eventually overcome all risks and return, as previously mentioned, in upwards of 8.5% since 1980.
The road is not smooth, there are potholes along the way. The average of intra-year drops during that period since 1980 is -14.1%. What did all those intra-year drops ever amount to? Did I mention the average 8.5% return? Did I gain anything at all by leaving my bed at 0330 hours to check the futures to see if I was going to be happy or grumpy that day? (In 2008 I lost a lot of sleep.) I gained nothing by worrying about what is essentially normal market activity.
So let’s rejoice over our returns in 2017 with a steady and prepared eye toward 2018. We must remember that market corrections happen. And with that recognition, keep in mind that if we stick to our investment plan, in the face of the dreaded correction that so many perma-doomsayers see coming, we will win. Corrections are normal and they are inconsequential. On the contrary, market corrections have the effect of returning equities to their rightful owners, i.e., long-term investors. They flush hot money out of our markets and allow us, the brave and logical, to increase our ownership by purchasing more shares for less money. We love those 20% to 30% off sales that enable us to accumulate a larger share in the economic freedoms great companies give to us, their owners.
