Stock markets are comprised of a collection of stocks. Good stocks, bad stocks, and all stocks in between can be found in a particular stock market. There are multiple stock markets across the world, and while we can’t directly invest in those markets, we can invest in products that closely track those markets. As I wrote above, all types of stocks are found in a stock market, so what happens to returns when we pull out a specific group of stocks?
 
It is common for a subset of stocks to drive a sizeable portion of an overall market’s return. Here you will find a DFA study that shows removing the top 10% of performers each year from 1994 to 2018 reduced global market performance from 7.2% to 2.9%! And further excluding the best 25% turns a positive return into a relatively large negative return!
 
If only we could predict which performers would be the best – and the worst – we could ramp up our returns…but we can’t.  And oftentimes past best performers don’t continue their strong performance into future years. Therefore, we must own a diversified portfolio. We don’t know which stocks will be the best, or the worst, or somewhere in between, but if we hold all of them, we’ll get the best, the worst, and the middle, and be left with a pretty decent return on our investment. If we pick and choose, and get it wrong, we’ll be left with paltry returns, or even no returns and actually a loss of our money…something we can’t have happen when we look to build our nest egg for retirement.
 
When we own everything, we’ll do well over any length of time.

Here you will find the Q2, 2019 Market Summary Report. Typically, I draw your attention to an informative or thought-provoking (in my opinion, at least😊) write up that concludes the quarterly report, but this time is different. On page 4 (pasted below, as well), you will find the Long-Term Market Summary for major index returns over the last 1, 5, and 10 years. I think it’s a very powerful graphic showing the importance of owning a diversified portfolio covering all these markets – you’ll see big green arrows all across the board! We know short-term time frames of especially 1 year, and even 5 years can exhibit very wild and unpredictable returns, but 10 year returns start to show pretty reliable numbers – typically you will find two things: 1) positive returns; and 2) stocks offering better returns than bonds. We know owing stocks (for growth) and bonds (for protection and income) for the long-term are a great wealth building and wealth preserving tool and graphics like these reinforce that belief.

Everybody has or knows someone who has a great market timing story. Their story might be a little exaggerated or embellished, but it’s probably mostly true…of course, you typically only hear the good stories and not the bad ones.  Market timing is tough, very tough. It requires picking the right time to get into a stock and the right time to get out of a stock – it’s doubly hard to get it right both times. 
 
For every share of a stock bought, there is a share sold. Typically, this buying and selling is done at an exchange. The combined effect of all this buying and selling is that all available information is quickly incorporated into a stock’s price. So, trying to time the market based on an article you read, a TV show you watched, a chart you analyzed, or what your neighbor said is likely to send you chasing after old news. If only we could stay ahead of old news.
 
But what about professional stock pickers? They’re professionals, so they must know more than us, or be correct more often, right? Unfortunately, that’s not the case. Check out the this article from DFA to learn why.

Here you will find DFA's quarterly report for Q1, 2019.  In my Q4, 2018 quarterly report post, I pointed out the big red arrows that represented major stock market indexes across the globe*.  My key take away was that major markets do this in the short-term; there will continue to be stretches where markets perform very poorly, but we must stay vigilant and know these big red arrows are a temporary bump in the road to the overall growth of major markets (more green arrows) and more importantly the growth of our retirement portfolios.  Remember markets move quickly and we saw that happen over the last six and especially the last four months!
 
*”Q4, 2018” graphic below represents the whole year, but the market losses were concentrated in Q4
 
Q4, 2018

"Markets move quickly!" – you’ve heard me say it or write it countless times.
 
The S&P 500 (which represents over 500 of the biggest companies in the U.S.) had its worst December since 1931. What happened next? The S&P 500 had its best January since 1987. In December, did we panic and sell? No. In January, did we get over-confident and make irrational decisions? Didn’t do that either. Instead, we stayed calm. And we stayed calm because we know this is what markets do; they’ve done this before too many times to count, so when it happened in December / January, we were prepared and we knew how to handle it, and when it happens again, we’ll be prepared for that too.
 
Kudos to our clients because not one panicked in December; there were emails and phone calls, which are welcomed, but nobody sold while the markets were down. If it was warranted, we took opportunities to shift money into stocks for clients and (on paper at least) they’ve received a little extra boost in their portfolio’s value with January’s rebound, more so than if we had done nothing in December, or even worse, had we sold in December.
 
Again, stay calm and stay the course, but the more of these quick volatile moves we get through, the better prepared and less worried we’ll be when they happen again.