Nothing! There is nothing for you to do, except remain calm and know this is what markets do. They go up and down, and typically those movements are sharp and quick, too. Plus, as markets increase in value, the nominal movements represented by points in the DOW or the S&P 500 for example will go up and down in larger numbers compared to decades ago. That is why you’ll see headlines like “largest point drop in history!” Keep in mind percentage-wise these movements are normal.
I like this quote from this article [original article is missing], “These kinds of corrections are a normal process. Where the bottom is I don’t know but the fundamentals haven’t changed.” The term fundamentals is referencing the overall fundamentals of the U.S. (and global) economy. But I think you should look at your own fundamentals. And those are your reasons for owning stocks. For those of you a couple decades away from retirement, you have a heavy stock exposure because your fundamentals are ‘I want to grow my retirement pie as big as possible, therefore I have to stay calm throughout the craziness and I know I’m going to see a lot of it on my road to retirement.’
For those of you in retirement now, your fundamentals for owning stocks are ‘I can’t leave all my money in cash cuz inflation is going to eat away at it, so I need a balance of protection with a little bit of growth, too.’ Protection comes in the form of investment grade bonds which will continue to generate income for you during calm and crazy times, and historically have shown to do well when stocks do poorly (though this is not always the case). Growth comes from the right mix of a globally diverse stock exposure which will go down in value when the market goes down, but you’re not going to feel too much pain because it’s a smaller slice of your retirement portfolio. And when stocks go down Pensinger Financial takes a bit of your bond money and buys good companies while they’re on sale; over the long-run you buy low and sell high that way and that’s one way to generate growth from your stocks.
SEEKING INVESTMENT CERTAINTY IN AN UNCERTAIN WORLD
Have you been following the advice, or maybe thinking about following the advice, of a stock market guru on your favorite news channel? Is he saying “this is the next Amazon” or is she saying “Get out now while you still have any money left!” Stock market gurus and professional stock pickers are just as good [bad] at predicting the future as you and me. Sure, they’re going to be right sometimes; when the outcome is up, down or flat, it’s not too tough to guess right. The main issue, however, is being consistently right, and no guru is consistently right. Are we reacting to a guru who guessed right or to a guru who guessed wrong? This short article expands on the psychology behind why us humans seek out those we think can predict the future – and how the reason for that mentality is because we crave certainty in an uncertain world. When we react to uncertainty, we could run into major problems that could seriously derail our retirement aspirations. Instead of being reactive we need to be proactive with an investment philosophy rooted in decades of academic research; an investment philosophy that says we can’t predict the future, but we can prepare ourselves for how we handle the unpredictable future. When we face uncertainty, we don’t want to rely on the so-called predictive powers of someone we see on TV, instead, we want to rely academics, research, and data because over the long-term – and remember we invest for the long-term, not the short-term – they provide the certainty we crave in an uncertain world.
Q4 2017 QUARTERLY AND 2017 YEAR END REPORT
Here you'll find the Q4 2017 Quarterly and Year End 2017 Report. In it you’ll find a summary of returns of various major markets around the globe for Q4 and the entirety of 2017. It was a very good year for major markets; you can see this on page 21 in the attachment, and I have pasted the table below, as well.
We should have put all of our money in emerging markets, right – we would have got the best return? Wrong. We don’t know which markets are going to do great and which ones are going to fall off a cliff (see emerging markets 2008: down 53%!). We like seeing all green arrows pointing up, but the reality is this isn’t going to happen every year. Most years will be a mixed back of up and down returns and there will be years when we see all red arrows pointing down for our stocks holdings. This is investing. We don’t know which market is going to be great or terrible, and we don’t know if we’ll get all green arrows or all red arrows, so we need to have exposure to everything, so we can participate in their returns when they are great. And when those returns are bad, we know it’s a short-term bump in the road on the long-term journey towards building wealth for retirement. Over your long-term wealth building journey, you’re gonna see a lot more green arrows than red, so you need to be invested – and remain invested – or you’ll miss a once in a lifetime trip.
KEY QUESTIONS THE LONG-TERM INVESTOR SHOULD BE ASKING
I encourage you to give this DFA article a read. The answers to the article’s nine questions for the long-term investor are at the foundation of our investment philosophy, a philosophy which guides the construction, investment selection and ongoing monitoring of your retirement portfolio. You can read our investment philosophy here.
AS GOES JANUARY, SO GOES THE MARKET, RIGHT?
Some Wall Street pundits and stock market investors like to have a catchy saying to offer a sort of predictive power and a guide to how and when to invest. “Sell in May and go away” implies to get out of the stock market in May and take the summer off only to jump back in after the summer vacation is over.
With the New Year here, how does “As January goes, so goes the year” hold up to predicting how the rest of the year’s stock market returns will be based upon the return of the stock market in January? The suggestion is that if the stock market has a negative return in January then we’re in for a negative return year.
The data in this article shows the monthly returns of the S&P 500 Index for each January since 1926, compared to the subsequent 11-month return (February – December). A negative return in January was followed by a positive 11-month return about 60% of the time, with an average return during those 11 months of around 7%.
Conclusion: the long-term health of our retirement portfolio should not be predicated on the whether the first month (or any month for that matter) is good or bad. From the article: “We should remember that frequent changes to an investment strategy can hurt performance. Rather than trying to bear the market based on hunches, headlines, or indicators, investors who remain disciplined can let markets work for them over time.”
DIVERSIFICATION
Investors tend to think ‘invest in what we know.’ I think there’s something to be said for understanding what we are investing in, however, the issue is we might concentrate our investments in U.S. stocks because we know companies like Amazon, Walgreens, and IBM and we’re comfortable with them; while we’re hesitant of investing our money in a foreign company who’s name we can’t pronounce. This is known as “home-country bias” and it’s not just observed here in the U.S. with American companies, it’s observed across countries around the world.
I pulled out the first table from this DFA article (however, because of its size it’s probably best viewed in the attached PDF). A neat thing to do is to focus on one color and see how it jumps around year after year – this is the returns for a specific country every year going back to 1997. The light blue of USA and the dark blue of Switzerland are two easy colors to follow. 13 of these 21 developed countries had the best performing stock market in a given year, and no country was the best performer for more than two consecutive years.
It’s difficult to know which markets will outperform from year to year, so by holding a globally diversified portfolio (which we do) we are well positioned to capture returns wherever they occur – we get the good with the bad, but over the long-term we get a lot more good than bad and that approach builds wealth for our retirement.
