Are We All Doomed?

In 2014 Fidelity performed a study on who their best investors were. What set these geniuses apart from the pack? Hours of research? Insider information?  No….

They forgot they had accounts.

Hardly shocking, considering the dramatic news cycle we are all exposed to. In the palm of your hand you can constantly be reminded how poorly your investments are performing on any given day. Even worse, you can act on it instantly. You panic, abandon your long-term strategy, and sell at an awful time.

Even if you stay off your phone, you probably sit down at your desk and eventually get to the homepages of Yahoo Finance or CNN Money. Every week it seems these click-hungry news pages throw around words like “collapse” and “plummeting”. There’s red everywhere on the screen and it looks like the whole site is burning down. The dramatic nature of these news organizations causes panic among investors. But the data tells a very different, less exciting, more lucrative story:

This is normal.

The consistent positive monthly returns of 2016 and 2017 were an exception rather than a rule. Looking historically, you can expect the stock market to jump around when examining time periods of less than five years. A picture is worth a thousand words:

 

 

On average, equities return a higher rate because they reward you for going through the ups and downs. Bonds typically return less, because you aren’t subject to such dramatic peaks and valleys.

Looking even closer, there are average intra-year drops of -13.8% per year from 1980 to 2017. The average annual return is 8.8%. Even in positive years such as 2016, where the market returned 10%, there was a -11% intra-year decline from a peak to a trough. So what about this year, a year in which news outlets have dramatically claimed HUGE dips in the market? Well, in 2018, we’ve only experienced a -10% market drop and the S&P is positive year-to-date, returning 4% from Jan 1 through today, 11/6. Hardly a tumultuous time in history.

Recognize what news organizations are trying to achieve. Their number one goal is to get you to click on the link to their article. Titling the article “market experiences normal fluctuation, stay the course” isn’t likely to get much traffic. Something along the lines of “Are We All Doomed?” should do the trick. After all, it just worked.