If it wasn’t already abundantly clear prior to last year, 2020 certainly provided investors a harsh reminder of how quickly markets crosswinds can whipsaw a portfolio in today’s investing environment. While it’s long been accepted that volatility is the price one pays for long-term growth, it’s becoming more apparent that accelerating technology innovations in media and trading are likely exacerbating market moves. It seems what used to be multi-year cycles are now being compressed into a single year or even months!
In our view, this reinforces the need for long-term perspective supported by a well thought out and customized investment plan that is tailored to goals and actual lifestyles, not the blustery winds of market sentiment.
Enduring Inevitable Market Cycles
First, we do NOT believe it is “news” to state that we will endure another bear market. The question is not “if,” but “when.” Predicting another bear market is akin to a broken clock predicting it will be midnight again – wait long enough and the broken clock will be correct.
So we think it is well worth revisiting the fundamentals of what drives stock prices at the most basic levels. In short, stock prices are a discounting mechanism. Over the long term, the price of a stock, and the collective price of the stock market is nothing more than the total of all discounted future cash flows. Price fluctuations day-to-day are almost meaningless in this context. In fact, a great way to think about daily or even weekly market moves is to think of it like the weather. Just because it’s a perfect fall day with sun and 65-degree temperatures this week doesn’t mean you can conclude it will be like that forever into the future.
It’s not a stretch to say a bear market will come at some point, but predicting the timing is something altogether different. “Calling” a bear market in the coming days, weeks, or months and making market-timing predictions are distractions from what it takes to be a successful investor in the long run. It’s more prudent to maintain a long-term perspective and invest according to each client’s personal situation and goals, not according to headlines, shifts in the political winds, or obscure patterns in month-to-month averages.
Some Statistics to Consider
In taking this approach, history is on our side. There are many statistics that could be cited here, but two key numbers support the view that it’s worth enduring stock market volatility in order to achieve returns that outpace inflation.
The first number to consider is 3.3. Since 1926, this represents the average number of years it took for the stock market to hit a new high after suffering a 20% decline. If a portfolio has enough conservative investments like bonds and cash to generate the needed cash flow for that amount of time, an investor can successfully navigate the typical bear market without selling stocks at an inopportune time.
The second number to consider is 84%. Since 1918, this represents the percentage of time that the stock market produces a positive return for a rolling 10-year period. This means that in a typical 10-year period, the value of stocks in a portfolio would have increased for more than eight years. This percentage improved to 88% for rolling 15-year periods. In either time period, those are fantastic odds.
What’s the lesson here? In order to take advantage of the long-term growth prospects of investing in the stock market, we must be willing to endure short-term, headline-driven volatility. Such volatility can be unsettling and sometimes downright scary, but volatility creates buying opportunities for the disciplined investor. In such times it’s critical to focus on what is well within our control, such as the portfolio allocation between higher volatility growth assets like stocks and conservative “shock-absorbing” assets like bonds. When properly implemented, a wise asset allocation strategy can help us look beyond the headlines, blaring the latest crisis, and enjoy the many good things the fall season brings.
At Johnson Investment Counsel, our mission to deliver financial peace of mind at every step of life’s journey is what has guided our clients through crises, whether personal, economic, or market related. In times of uncertainty, we know that it’s critical to maintain a disciplined approach to achieve financial success. With over 55 years of experience, we are confident that holding to time-tested principles will allow us to navigate any market environment and ultimately achieve your financial goals.
If you are interested in learning how Johnson Investment Counsel can serve you, please email us and one of our Portfolio Managers will be in contact.
Find more practical advice on a wide variety of wealth management topics by exploring our JIC Blog: Beyond the Numbers library.
Disclaimer: Any expectations presented should not be taken as a guarantee or other assurance as to future results. Our opinions are a reflection of our best judgment at the time this presentation was created, and we disclaim any obligation to update or alter forward-looking statements as a result of new information, future events or otherwise. The material contained herein is based upon proprietary information and is provided purely for reference and as such is confidential and intended solely for those to whom it was provided by Johnson Investment Counsel.
Any expectations presented should not be taken as a guarantee or other assurance as to future results. Our opinions are a reflection of our best judgment at the time this presentation was created, and we disclaim any obligation to update or alter forward-looking statements as a result of new information, future events or otherwise. The material contained herein is based upon proprietary information and is provided purely for reference and as such is confidential and intended solely for those to whom it was provided by Johnson Investment Counsel.