Just in case you weren’t paying attention to the news in October, here’s what you missed. The stock market went down.
As you open your October statements, you’ll see evidence of the pullback in your account balances. But before you hit the panic button, here’s a few things to keep in mind.
Pullbacks are normal. They occur about once per year on average. They’re inevitable and necessary. They help squeeze excessive optimism out of the market and keep prices in check. It’s like those seasonal downpours in Florida. We may hate getting soaked in the rain, but it’s an unavoidable fact of life in the Sunshine State, and helps keep our state lush and green.
It can bounce back faster than you think. It’s not always a guarantee, but sometimes the rebound is pretty quick. Many holdings have already recovered from their October lows. That’s a good reason to stick with what you own. If you sell, you lock in losses. Stick it out, and you’re more likely to get back to where you were, before catching the next leg of the rally upward.
The market can surprise you. Many people investing now weren’t in the market in October 1987. But on Black Monday, October 19, the market fell an unimaginable 22% in one day (compare that to today’s 2% drop). We can’t even conceive of that happening now. That’s far more dramatic than anything we’ve ever seen in one day, even during the 2008 financial crisis. But believe it or not, a couple of months after that one-day disaster, the market had recovered and actually closed up for the year, registering an almost 3% annual gain. Go figure. Where the market is today shouldn’t mean that much to you as an investor. What you should care about is where the market will be five or ten years from now. After all, most people are investing for long-term results, not one-day performance.
Percentages are more meaningful. Big dollar drops in market value can be scary. But professional investors measure results in percentage terms, so they’re comparing apples to apples. For example, we mentioned above that a 10% pullback is likely to happen once per year on average. If you have a $1,000,000 portfolio, that’s a sobering $100,000 loss. That may unnerve a lot of people, but remind yourself it’s a fairly routine 10% drawdown. That same $100,000 loss on a $5,000,000 portfolio shrinks to only a 2% decline. I talked to one client the other day who was remarking on the dollar decline in her portfolio in October. We did the math; she actually had a fairly minimal 2.2% pullback. “That’s all?” she said. “It seemed bigger in dollar terms.”
Every portfolio is different. The results you experience depend on the investment mix for each particular account. For example, in October, accounts with more growth-oriented, technology-heavy investments got hit the worst. More conservative accounts, with fewer stocks, or less technology, did better. You may have several accounts, and each one can perform a little bit differently depending on the specific investment mix. It’s simply a reflection of the account holdings, and withdrawals, contributions, purchases and sales unique to that account. Keep in mind, as well, that if there is a rebound, those growth- and tech-oriented accounts will bounce back faster. It’s all a trade-off. What goes up faster, comes down faster. Just repeat: The best investment portfolio is not the one that’s doing well today. It’s the one that will get you to your goals tomorrow.
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