Dear Investor….It’s Not the End of the World!
Instead of the standard format for a blog post, choosing a topic and providing my commentary, I thought it would be interesting to share a recent email exchange I had with a client of mine. Not often (but more often than I’d like) I receive an email with an article with the “Headline du Jour” about why investors need to be out of the market ASAP. Present day media does an excellent job at proclaiming “the sky is falling” and then going silent when inevitably the sky stays right where it should. The problem is people read these articles, take them for financial advice and make real decisions in regards to their portfolios, damning themselves to lackluster returns, prolonging their working years, and reducing their golden years.
I won’t provide the actual article I received because similar ones are found all over the internet, CNBC, and most other major news outlets. I will say, however, that the general message of this particular article was that the US economy is in dire straits, has been for the last ten years, and is only getting worse. Whether it be this article or one about BREXIT, Interest Rates, tanking oil prices, Y2K, the Chinese economy, etc, etc, your reaction should be the same every time, which is no reaction at all. A serious (successful) long term investor with a solid financial plan in place does not and should not react to any news headline. Indeed, they should try to abstain from consuming them altogether.
“Dear Client, I read your article in full. It was interesting, to say the least. However, it mirrored many other articles I have read in the past and not just the recent past. In every decade there are alarmists and doomsayers that predict the fall of the economy. Some are right and some are wrong but not because of a thorough understanding of the situation but purely by chance. The US Economy, not to mention the world economy is far too complex, far too large, and has far too many inputs for any one person, agency, or think-tank, et al. to make any sort of meaningful prediction. Time and time again, the data shows that if you try to react to these kinds of situations by timing the market you lose out. Think back to the Trump election, a shock to everyone, it was discussed that possibly pulling out of the markets for the time being to wait it out would be a prudent idea. Had that scenario played out you would have missed out on multiple thousands of dollars of returns. This rally happened, even though many people were thinking the exact opposite would occur. In fact, what I have seen is that when things seem the most dire is the point when things turn around and start improving.”
I went on to suggest another article with an alternate perspective. The article which I will not share here only because it’s from a subscription newsletter that is very protective of intellectual property and not intended for general publication. However, the basic premise is that despite what on the surface seemed like a tumultuous year, 2016 was actually a very good year, if not one of the best in recent history. Some highlights to back up this claim are as follows:
- U.S. household net worth ended the year at about $90 trillion. More than a third higher than its 2007 pre-recession peak.
- The average price of a single-family home also surmounted its pre-recession peak for the first time.
- The cancer death rate in the U.S. has dropped 25% since 1991 (according to the American Cancer Society).
- The Lancet (medical journal) reported that an experimental Ebola vaccine provides 100% protection against that lethal disease.
- The Ice Bucket Challenge enabled the University of Massachusetts Medical School to identify a third gene that is a cause of ALS (Lou Gehrig’s Disease).
- The Americas were declared measles-free by The Pan American Health Organization.
- The U.S. household debt ratio was estimated to have hit its lowest level since 1980 (JP Morgan).
- Wild Atlantic salmon are spawning in the Connecticut River for the first time since the American Revolution.
- The cash dividend of the Standard & Poor’s 500-Stock Index reached a new all-time high (S&P). At about $45, it is roughly seven times what it was in 1980.
- Humpback whales, giant pandas, green sea turtles and manatees were removed from the endangered species category and the global wild tiger population rose for the first time in a hundred years.
- In August, the three major U.S. stock indexes—the Dow Jones Industrials, S&P 500 and NASDAQ Composite—made new all-time highs on the same day for the first time since 1999.
- Scientists at MIT found that the ozone layer appears to be repairing itself and estimated that the hole in the ozone layer above the South Pole has shrunk by over 1.5 million square miles from its largest extent in 2000, and that it will fully close by 2050.
- Cash as a percentage of current assets of S&P 500 companies ended the year at roughly thirty percent—about double what it was at the turn of this century (J.P. Morgan). This cash hoard should afford companies more of a buffer against shocks of all kinds.
- Although the labor force participation rate remained relatively low, the U.S. unemployment rate sank to a trough of 4.6%, a level not seen since August 2007. In December, wages increased 2.9% year-over-year, the best annual rate since 2009.
- Pope Francis met with Patriarch Kirill of the Eastern Orthodox Church. It was the first encounter between the leaders of Christianity’s two largest churches since the Great Schism of 1054, when the Eastern Orthodoxy split with Rome.
- Despite declining eleven percent in the first six weeks of 2016, the S&P 500 went on to rise approximately ten percent (ignoring dividends) for the year.
My point in sending this article was not to convince the client it was or wasn’t a great year but to show the value in perspective. This article and the one my client sent are polar opposites despite discussing a very similar period of time.
In behavioral finance there are certain biases that can hinder our financial success. One in particular, is called “confirmation bias” which means that a person will look for and accept news/information that supports his/her preconceived beliefs, while de-valuing contradictory information. There are a couple solutions to this, either acknowledge there are different opinions, actively seek them out and assimilate them with an open mind, or, in my opinion, the better solution, ignore the articles, opinions, and commentary relating to things outside your control. The economy, the state of politics, the headline du jour, all have no impact on the financial plan of a long-term, disciplined investor. In the next 20-30 years, I firmly believe the world will be in a better place than it is now, just like it has continued to improve from the previous 20 year periods of time. I believe in the ingenuity, creativity, and drive of the human race to grow and improve its situation.
Ultimately, my suggestion to Mr. Client is that they stay the course, do not make any changes to their portfolio (unless their plan, not the news headlines dictate a change). I am not saying that the market will continue to go up forever because it won’t. There will be a market correction, many times before we are done, but the point is that no one knows when they will occur and how severe they will be. It will be hard but when a correction does occur I encourage everyone to embrace it. Know that things will eventually turn around and that the correction is actually providing you with an excellent opportunity to purchase at bargain sale prices, more of best companies in the world who’s only goal is to make money for its shareholders, you, me, and the millions of others who have the fortitude to not sell when things seem to be at their worst.
About the Author
Our Blog Post today was brought to you by a fellow fee-only financial advisor, Phillip Christenson of Phillip James Financial. Phillip is a CFA, Chartered Financial Analyst, portfolio manager, and retirement planner in Plymouth, MN. He helps people with comprehensive financial planning, tax preparation, and retirement projections. If you’re ever in Minnesota reach out to Phillip for further financial help.