When we’ve had the sort of markets we’ve had of late…the sort that seems to go up effortlessly without resistance and feels like it will never stop going up much less go down… it can be very difficult to come to terms with the reality that eventually… it will. Just as it eventually rains after many days of sunshine, financial markets, behaving normally, will eventually have a period of “rain”, no matter how “sunny” things have been. My purpose is not to take a happy time and make it sad, but rather to prepare you somewhat for what will inevitably occur…so that your currently very strong investment convictions will not be tested too severely during a less comfortable market when it ultimately makes its appearance. Just as you did the right thing to hang in there to experience the nice ride we’ve been having since November, you must remember to also do the right thing…the next time it doesn’t feel so good to do the right thing.
Why do I choose to rain just a little bit on our parade? Let’s consider a few things:
- Over the last 12 months the S&P 500 is up between 23% and 24% as of March 1st (from Morningstar). I am not trying to predict the future, but it just doesn’t seem likely it’d do that again over the next 12 months.
- As I have observed in several previous blogs, the equity markets have had an average pullback of about 14% … annually… since at least 1980. It doesn’t do this every single year obviously. Some years it doesn’t do this at all, and some years it is a more pronounced decline. As a matter of record, it essentially had close to this kind of pullback in the fall of 2015 and again during the first six weeks of 2016, lest we forget. Thus, we should not be surprised, and I’d argue we could reasonably expect it could happen sometime this year.
- Interest rates have gone back up appreciably in recent months; industrial commodity prices are trending back toward their old highs, which is usually a sign of stronger economic growth; even gold has had kind of a mini-flurry since about Christmas time. The sum of these parts might even suggest we’ll start hearing more discussion of the “I” word – inflation- a little more frequently on the evening news… which could be enough to prompt the markets to reverse a bit at some point.
If the markets take a breather just when the media start pushing an inflation narrative, or for ANY other reason, we should not worry. For a long term investor with a disciplined strategy that includes a healthy allocation to equities, no changes in your portfolio should be warranted. Remember, if your goals haven’t changed, don’t change your portfolio. Also remember that positive market years have far outnumbered negative years historically and all market declines to date since the beginning of whenever we’ve recorded these things have been temporary. These declines are normal…though always caused by any number of “this time is different” catalysts. As famed investment manager Peter Lynch is credited with saying, “the real key to making money in stocks, is not to get scared out of them.”
I’ll leave you with these “final words of wisdom”: 1. Never make long term investment decisions based on current events; 2. Put little stock in short term rates of return…positive or negative; 3. Stick with the portfolio whose long term historical record would, if continued, give you the best probability of reaching your goals; and 4. If the next market correction causes you to lose too much sleep…turn off the TV.