Gary R. Matthews
If you’re the kind of investor who likes to worry, then October has given you plenty of stimulus. After this week’s declines in the popular S&P 500 index, the index has lost 8.8% in this month alone, wiping out all the gains that we’ve enjoyed this year, putting the index in negative territory. The once-soaring Nasdaq Composite Index of technology companies tumbled 4.4% on a single day this week. It’s time again to remind ourselves of some tried and true investment wisdom.
In times when the markets are dropping, even if they haven’t hit correction territory yet (that would be a 10% drop), the media needs to find a narrative, and you hear all sorts of theories. Corporate earnings have nowhere to go but down. The tariffs are slowing down economic activity. Interest rates are rising.
All of that is true, but none of it has anything to do with why the markets are falling right now. The only true headline, and one you will never read, is that stocks are falling because some people are losing faith in their investments and selling out to bargain hunters. Sometimes this activity feeds on itself; when people see the markets falling, they, too, begin to panic.
The stock markets periodically deliver losses for reasons which are not always obvious even after the fact. Bear markets are a normal part of investing, and this is actually a good thing, because it allows real investors to periodically rebalance their portfolios in favor of lower-priced stocks. Research has shown that there is a gap between the return most investors get from their stock investments and the actual returns delivered by those stock investments. This is because most investors sell this or that security before it goes up - or sell out and then wait to get back in until the market has gone up past where they sold. Getting the full return of the markets is relatively easy: just hang on during those periodic downturns.
But those downturns are terribly painful, right? Take a look at this chart, created by First Trust Corporation, which shows the bull and bear markets since the Great Depression. Notice the downturns have been sharp but relatively brief, while the up-markets have been protracted and generous.
This has been the pattern up to now, and there’s no reason to think it won’t continue, at least for the foreseeable future. SRI investors are helping to direct capital toward the sustainable parts of the economy, so that business activity serves to create more value in the world than it destroys. Success in that will help the markets continue their upward march well into the future.
You don’t need an explanation for why markets go down in order to benefit from them. You just need the ability not to startle when the herd of investors suddenly makes an unexpected dash for the exits.
Worry about the downturn if you must. But know that worry is the precursor to being scared. And if you see somebody predicting where the markets are going from here, if they’re not wearing a wizard’s hat and gazing into a crystal ball, it’s probably best to turn off your attention. Actually, even if they are wearing a wizard’s hat…..
Adapted from a Bob Veres draft, with permission.