“It was the best of times, it was the worst of times, … it was the spring of hope, it was the winter of despair.”
Commentary on the markets? Not quite.
That passage was written over 150 years ago as the dramatic introduction to Charles Dickens’ A Tale of Two Cities, setting the stage for his classic novel about the French Revolution and the twisted fates of characters in both Paris and London.
But Dickens could easily have been writing about this year’s tumultuous investment markets.
The third quarter, which ended September 30, registered the worst investment performance since 2011.
Large U.S. stocks lost over 6% for the quarter, while small cap and emerging market stocks declined 12% to 18%.
Time to exit the market? Not so fast.
The next month – October 2015 – saw a huge market rebound, with the market scoring the best monthly performance in four years.
Stocks snapped back, gaining 6% to 8% for the month.
With those two extreme back-to-back months – one down and one up – you can imagine the range of calls we’re fielding from clients.
Calling about bad results? You must be looking at quarterly reports summarizing year-to-date performance as of September 30 (covering the big market decline).
Seeing huge dollar gains? You must be looking at the October 31 statements just received in the mail.
Same market … just different months, and totally different results.
So is it the best of times, or the worst of times? Here’s how clients and investors can make sense of the market gyrations:
Don’t read too much into day-to-day, month-to-month, quarter-to-quarter, or even year-to-year performance. To be a successful investor, you have to think long-term, and for most people investing for retirement, that means a 30 or 40-year time commitment in the markets. What you do in one month, or one quarter, is frankly not that relevant. What matters is the extraordinary growth you can achieve when you commit to a disciplined, long-term investment strategy.
Focus on the long-term. Optimizing your investment performance for good day-to-day performance (like cutting your losses when the market drops) may help you win the battle, but lose the war. Research shows that frequent trading and tactical portfolio changes cut into long-term growth (see our recent story “Is Your Smartphone Making Your Investments Dumber?“).
Think percentages, not dollars. Last quarter, we received a few panicked calls from investors. “I just opened my statement and I’m down $40,000! What happened?” While that sounds like a lot of money in dollar terms, it might not move the needle in percentage terms, which is what really matters in investment performance.
For example, a $40,000 slide on a $1,000,000 portfolio is only a 4% drop. That’s much less than what markets actually lost in September, then regained in October.
So as uncomfortable as it is to “lose” that much money, remember that investors should expect to see a decline of 10% or more once per year on average. When you see big price movements on your monthly statement, don’t be alarmed. That’s just what stocks do, and it’s not a “loss” (unless you sell) when your ultimate finish line is thirty years into the future.
Unhappy about the market? Don’t worry. It won’t last. Stocks do go down. But they also go up, and there’s no denying that the long-term U.S. historical trend has been a continued, if uneven, climb upward. If you and your financial advisor have determined that stocks deserve a place in your portfolio asset allocation, don’t give up just because you’ve hit a few rough months. Have faith, and stick it out.
Tune it out. If you really don’t like the ride on the market roller coaster, here’s the best suggestion of all. Just tune it out. Turn off CNBC, stop checking your account market values every day (or even month), and just live your life. You’ll be happier, and according to all the investment research out there, the less you stress, and the less you tinker with your investments, the more money you’ll make.