Three weeks of riding this market roller coaster has made many people throw in the towels and just concede. We’ve spoken with too many people who have reached this point of frustration with the markets and have the mentality that things will never turn around. Many of you have likely had or have similar feelings.
Here's our advice. Stay the course. This is, unfortunately, just how markets act.
While we can (and do) preach day in and day out to stay the course, sometimes it helps to hear from someone that has been around the markets for decades. This past week, John Bogle, the founder of Vanguard, was on a financial media show and asked what investors should do. His answer was, “Stay put. Do nothing. Keep your allocation and don’t do anything.”
Hearing John Bogle say this hopefully reinforces our message. There is a long-term basis for why we as investors should stay the course and not try to outmaneuver the irrationality of markets. We don’t believe that the U.S. is in a recession right now or that one is likely to occur in 2016. Will one occur again at some point? Yes, but we don’t see it happening this year.
You don't have to have a recession for markets to fall, though. There have actually been 16 times since 1939 where we have seen double digit declines in the stock market and we didn’t see a recession. The average drop was nearly 20%. Clearly, markets and recessions don’t necessarily go hand-in-hand.
What’s even more telling is what happened after those drops in the following years. Of those 16 periods of double-digit drops without a recession, the markets were on average up about 80% five years later and over 200% on average 10 years later. This demonstrates again why investors should stay the course.
Looking back to 2011, the last time we saw a 20% correction in the markets, the concern was oil and gas prices surging. Today the concern and headline is oil prices falling. In 2011, the surge in oil prices was a reason behind the falling markets while today falling oil prices are the main reason behind markets falling. This shows the irrationality of the markets. But what it also shows is that you can’t beat irrationality by trading your portfolio.
The only way to beat irrationality is to hold true to your strategy. If you have a proper allocation, then the recipe to beating irrationality is holding true. We saw that over the long term in 2011, and we will likely see that over the long term again here.
We know that this can be an unsettling time as an investor and that is why we try to present an objective view. We want to help you separate the emotions to help you make better long-term investing decisions. If you want to talk with us further, we are here for you. Call us or email us directly.