Whiplash is a neck injury due to forceful, rapid back-and-forth movement of the neck, like the cracking of a whip. Sound like our investment markets recently? Like whiplash, volatile market fluctuations may cause pain, stiffness, and headaches, especially if you enjoy following every day’s market fluctuations. Interestingly enough, the remedy for both is also similar – patience and rest while the injury heals. (Note: this is not intended to be used as medical advice for whiplash!) This can be hard to practice as we watch the markets hurl themselves in completely opposite directions almost daily. In the past month alone we’ve seen the S&P 500 decline nearly 3% from Aug 2 – 5th, only to be followed by a rebound of 3.3% from Aug 5th to the 8th*. When the average annual return of the S&P 500 from 1960 – 2018 is 9.8%**, these moves represent nearly a third of the total annual return. Little wonder they shake the markets.
At Dolan Capital, we prefer to use data analysis to guide our investment advice. From this data, we know that trying to time the ups and downs of the market is futile – albeit tempting. To help you avoid this temptation we have attached a graph showing the impact on performance if you remain invested vs. missing a few days of strong market return (see below). Of course, we know logically the reverse is true – if you can reliably predict which days are going to be one of those 3% loss days. Or maybe it’s one of those days that drops precipitously in the morning only to rebound by market close.
To make this even more difficult, statistically volatile positive and negative days occur close together. The 4 days between February 6, 2018 and Feb 9, 2018 recorded three of the four largest intraday point swings for the S&P 500. On Feb 6 and 9th the markets closed up over the intraday lows by 3.9% and 3.4%, respectively, while on Feb 8th the S&P 500 closed down from the intraday high 3.9%. All three days saw intraday swings of over 4%*. Does anyone even recall this? Probably very few.
The markets will survive trade disputes, political rhetoric, and inverted yield curves. Market downturns are a normal part of investing and your portfolio will experience many of them. Our advice, given the current market environment: patience and rest.
*Intraday data for this article provided by Yahoo Finance
**Return data provided by Morningstar
On March 9, 2015, the Wall Street Journal ran an article titled “How to Survive a Bear Market.” The article highlighted the prediction, by experts, analysts, and amateurs alike, of a market downturn following the six-year bull market beginning March 2009. But the markets proved resilient, and the ensuing 3 years produced a cumulative return of 31.09% for the S&P 500, or an annualized return of 7.34%. Accurate long-term market predictions are a near impossibility, and something Wall Street has been trying to accomplish for decades without success.
We all know investing in the stock market produces a greater return over the long run than safer, less volatile investments, such as treasury bonds. So, logically, we all expect to see downturns and bear markets. Dealing with these downturns and bear markets emotionally when we are in the throes of a market decline is another thing entirely. Once the markets begin to decline, we assume that the decline will continue into the foreseeable future, and we often feel the need to make changes to our portfolio or pull money from the market, “just until things calm down.”
So what is the real answer? Can you survive a bear market? Most investors ask, “Where is the market headed?” The question they should be asking is, “When do I need the money?” We know that bear markets occur on a regular, irregular basis. See the chart below. Bear markets can be a reaction to true economic concerns, but can also be the result of a mini-panic. Recall the intra-year loss of over 19% in 2011 and declines of 12% in the Fall of 2015 over concerns about China’s slowing economic growth.
Surviving a bear market takes pre-planning. Money needed within the next several years should be invested in safe/non-volatile assets to ensure the availability of the money when you need it. Keeping your investments widely diversified will help you capture at least some upside in every asset class, as well as reduce volatility. Don’t take risks with fixed income. That portion of the portfolio is meant to act as a buffer, allowing you to take the equity risk needed to outpace inflation over the long term. High-risk bonds have a propensity to act like equities when the markets are volatile, just when you need the stability the most.
Finally, know that the skill of extrapolating bad experiences into the future is handy for human survival, but doesn’t apply to investing. Learning to stay away from snakes once you’ve been bitten is smart. Assuming the market will continue to decline because it’s already declined 20% is human nature, but not based in fact or on data. In a sense, successful investing goes against so much of what has kept us alive for thousands of years.