the right way to invest blog
Last week I posted the importance of understanding that markets move quickly. What could happen to your portfolio if you miss just a handful of the days when the market moves sharply up? The answer is a significant reduction in your portfolio’s value. And nobody knows when those sharp up (and down) days are going to happen, so the only way we can participate in those days is to be invested every single day. In doing that, we’ll take the bad with the good – fortunately there’s a lot less bad than good – but the key thing is that we’ll ensure we participate in every up day because if we miss just one or a handful of the best up days the ramifications are drastic. The graphic below shows the hypothetical growth of $1,000 invested in US stocks in 1970 and what would be the outcome if you stayed invested every single day, if you missed just the one best day (out of >12,500 days), and so on…
I’m not the first person to note “markets move quickly,” but it’s a sentiment I share often as a reminder that they do…move….really…quickly. So we need to understand what that means and be prepared for when it happens. We’ve seen the stock market wipe out years of gains in about 5 weeks’ time, but today, we saw nearly a 10% move to the upside from yesterday’s closing price. Let’s put today’s move into perspective: on 3/23/2020 the S&P 500 bottomed at 2,193, today it closed at 2,446; 2,193 was a price we saw around Thanksgiving, 2016; the S&P 500 didn’t close above 2,446 until the beginning of July, 2017 – over six months later!
The S&P 500, today alone returned what six plus months did in 2016 – 17. This is why we don’t market time, and this is why we don’t move to cash. Frankly, we just know we’re not gonna get those moves right, we’re not gonna get out February 21st and get back in yesterday. Had we missed today, that’s an 11.5% return we might not ever get another chance at. Instead, we grit our teeth and stay in, and when the market takes a big dive, we put some money to work, and when it takes a big dive again, we put so more money to work. Maybe we rebound from here and we saw the low of this move, or maybe we make new lows later this week. We just don’t know, and nobody else does. But, in time, the market will rebound, and we’ll be rewarded for it if we stay vigilant and fight through these tough times. Markets move quickly, so we must move quickly with them to the downside in order to move quickly with them to the upside.
I can’t speak about COVID-19 from a health and safety standpoint, but I can offer up this understanding of it from a market perspective. We are experiencing a “systematic risk” right now. Risks in the stock market can be split into systematic and unsystematic risks. In short, systematic risks are out of anyone’s control, while unsystematic risks are controllable.
A guiding investment approach is to control what we can control – those unsystematic risks: cost, portfolio exposure and allocation, time in the market, and staying the course as a disciplined investor during good and bad times. We cannot control systematic risks; systematic risks are unpredictable and nearly impossible to completely avoid, too. Common examples of systematic risks are interest rates, taxes, inflation, and the overall health of the economy. A more acute example of this is COVID-19. It remains to be seen if our response to COVID-19 is appropriately proactive or an overreaction. Regardless of the correct response, we have and will see an impact at the global economic level, and we have and will see an impact at our personal portfolio level, too.
As we come out of this and we look back, we’ll see the global economy will have slowed, just like our portfolios, but similarly – at some point – the global economy will rebound, and our portfolios will rebound, too. We will continue to control and mitigate unsystematic risks; systematic risks will always be present, and they will always be impactful. How we respond is paramount (both in an overall sense, and at our portfolio level). We can’t panic, this might get worse before it gets better, and we must look for opportunities to inject money into stocks while markets are down, and things have slowed. The US market has fully recovered from every historical market panic, and this time will be no different. In time, our resolve will reward us.
I’m sure you’ve been slammed with Coronavirus emails, and no doubt, your portfolio has felt its effect, but I’d like to share another one with you.
Think back to May, 2019 – just 10 months ago – you probably have no idea where the stock market was then, right? At that time, the S&P 500 was the price it was today…and the price it was in January, 2019, and November, 2018, and December, 2017. While it’s tough to see gains like these given back, the give back is temporary, and if you could go back in time and buy stocks at prices from May, 2019 and earlier, you’d probably take that opportunity. Well, that opportunity is now to put more money into stocks – cuz remember if you’re owning stocks, it’s because you have the appetite for the risk and reward that comes with owing them; and owning stocks doesn’t need to be an all or nothing affair, either (typically, those with longer time horizons will have more stock ownership) – a big slice or a small slice could be appropriate for you – so look to make your 2019 IRA contribution now, look to allocate some additional cash to your retirement portfolio, and we’ll look to rebalance your portfolio to put some money to work.
Undoubtably you’ve heard about two things this past week: Coronavirus and the stock market.
To recap: markets suffered their worst week since during the 2008 financial crisis with all three major indexes falling over 10%. It’s shocking and it hurts to see our portfolios take that kind of hit. Will this market sell-off continue? Will Coronavirus be the catalyst that turns a market correction into a bear market or a recession, or are we overreacting to a virus which may turn out to be far less impactful and harmful than winter flu? We don’t know.
But we do know stocks are at levels we saw in October, 2019. Had stocks stayed flat from then until now, how would we feel? We’d probably have less angst and anxiety than we do now, right? If our portfolios had stay flat for five months – even with this Coronavirus uncertainty – our emotions would probably have stayed flat, too. But when our portfolios make slow and steady movements up, but then come crashing down in a week and half, we feel different, despite the result being the same – and that result is today’s portfolio value mirroring October’s portfolio value. So the outcome is the same, but the route we took to get there was different.
Regardless of the route, we’ve got to stay focused on the long-term growth of our stock portfolios. Global uncertainties happen, market corrections happen, bear markets happen, recessions happen, and all of those will continue to happen, but what will also continue to happen is the one ultimate direction of the stock market: UP!
If we go back to that worst week in the last 12 years, the S&P 500 was around 900 (before ultimately bottoming below 700), today it sits a touch over 3,000. And think about all the global events, positive and negative, that have occurred since then…take the Coronavirus, the financial crisis and everything in between and realize that all market downturns do is present great opportunities for you to build wealth…great opportunities for you to buy good stocks on sale.
And that’s what we do for our clients - we stay calm during times of panic and we steadily focus on the long-term wealth building opportunities that is a diversified stock portfolio while seizing opportunities to buy good stocks on sale.
Michael Pensinger, CFP® is Owner and President of Pensinger Financial, Inc.
He grew up in Park Forest, Illinois and now resides in Lemont, Illinois with his wife, two children, and two dogs. Michael is actively involved in his community; coaching kids' sports, having served as Treasurer for the Lemont Area Chamber of Commerce Board of Directors, sitting on the Board of Directors for Hope & Friendship Foundation, and volunteering for the Lemont Heritage Woodland Sanctuary Open Space Committee. Read More
Lemont, Illinois 60439