If, after reading the title, you are unaware of what I’m going to talk about today, I urge you to read no further and stay in your blissful state. For the rest, though, some of whom are hyperventilating right now, I will first say: take a deep breath. What happened in the stock market today, really the last several days, is a reminder that investing is for the long term, not the short term.
The major stock indices were widely volatile, at times being down well over 2% but ending down around 1%, and the S&P 500 is down over 5% for the last 30 days. Moreover, as of today, equities are essentially flat for the year. Regardless, if exactly 5 years ago someone had told me that the markets would have an average annual return through today of around 12%, I wouldn’t have believed them. And yet we have.
What’s next? Well, this weekend millions of people will go to college and professional football games, and each of them will spend hundreds of dollars. In the next few weeks, holiday shopping will ramp up and millions of shoppers will spend billions of dollars on gifts. Oil prices have dropped which is bad for the Texas economy, but good for peoples’ monthly spending, not only for their own driving expenses but also for the cost of goods that they purchase which may go down some due to lower shipping costs. My point here is that life goes on, and spending continues, despite what is happening in the stock market.
The lesson, which I’ll repeat, is that investing is for the long term. None of the percentages mentioned in the earlier paragraph will directly translate into individuals’ managed portfolios (by me, for example) as those portfolios are 1) diversified among several asset classes (the ‘major indices’ are all large cap stocks), 2) rebalanced periodically (which essentially involves buying low and selling high through the market cycles) and 3) not over weighted in any particular security or sector (vs. the major indices of which some are value weighted meaning that one large stock’s movements will make the entire index sway).
As a reminder, keep cash on hand in a savings account that will cover your short and intermediate term needs and will help you sleep at night through market corrections such as this one. That cash, while earning essentially 0% today and lagging inflation, is also not losing any money. I’m NOT suggesting, though, that you should be in all cash, or liquidate today. Only that cash is an essential part of a diversified portfolio, as is real estate.
So remember your big picture and, if you are still having trouble dealing with days and weeks like this, perhaps you should revisit your long term investment objective. If that’s the case, please feel free to call me to discuss!