Blake Street, CFP®
Chief Investment Officer
Warren Street Wealth Advisors
If it wasn’t for pleasure, we wouldn’t understand pain. Sunshine wouldn’t be special, if it wasn’t for rain. Similarly, if investing didn’t involve risk of loss, there’d be no gains.
I’m terrible with rhymes, but hopefully, I’ll be better at calming rattled nerves.
After a vicious 3 day slide in equity markets, which amount to one of the toughest three day slides in history, it’s easy to feel glum. Our virtually uninterrupted 7-year bull market has seemingly been euthanized overnight. The emotional reaction, is to run, to hide, to get out of the markets as fast you possibly can. A steady hand wants to keep you from doing so. Neither you, nor I, nor anyone know exactly what the coming weeks will hold. I do however believe with discipline, expertise, and a century’s worth of data, we’ll make the right decisions for the years ahead.
Since 1957, the S&P500 has had 48 drawdowns (fall from peaks) from all-time highs of 5%, 17 of 48 went on to become at least 10%, and 9 of 48 became at least 20%. In short order, we’ve crossed the 10% threshold. Your guess is as good as mine if we’ll cross the 20% line as well. Momentum certainly makes us feel like we will and short term volatility has less to do with valuation and more to do with the battle of buyers and sellers and who might win the day. The graph below highlights just how common these 5, 10, and 20% corrections can be. It’s part of investing and trying to time your entry and exits around these events, is generally futile.
Credit to Michael Batnick at the Irrelevant Investor for the graph.
What I do know, is that our clients are investing appropriately according to their goals. Whenever we construct a portfolio, we’re taking your personal timeline into account, one that includes bear markets, recessions, corrections and the like. A little turbulence doesn’t make us forget what we know about operating in the cockpit. This chart from Morgan Housel at the Motley Fool, reinforces the message that selling into weakness is generally the wrong play for the long term.
The chart illustrates that after a 10% drop, stocks are higher five years later 86% of the time. The average return during that period is 51%, which is great. If the market were to fall 20% from its all-time high, historically it’s been higher five years later 89% of the time. We like these odds, while historical, they provide a greater context to why you don’t sell into weakness. Not only is timing the re-entry really hard if you exit the market, you’ve only truly lost money once you’ve sold a position.
The sky is not falling, and we will continue to do our best to own more of the things that will hold up well, and buy into things when they become oversold. As of now, we don’t see data pointing too a large systemic and contagious weakness bringing markets to their knees. If that changes, we will move accordingly.
There are no guarantees in investing, but there are guarantees in our commitment to putting our clients first. Steady hands, heads up, eyes forward. Thank you for the opportunity to serve.
As always, should you wish to discuss your long term investment and financial plan, now is a good time to connect with your advisor. We understand how you may be feeling, let us help.
Blake Street, CFP®