Are you familiar with the saying, “Even a blind squirrel finds a nut every once in a while”?
The year of 2017 (and every year since 2009) in the stock markets could fall under this category – and prove dangerous to those not recognizing or admitting this reality. In other words when the S&P 500, the index of the largest and most recognizable companies in America, rises every year (including dividends) for 9 years in a row (and was up over 13.5% in 6 out of those 9 years) we have been given a slightly false sense of security that investing is easy.
This is not to say that these types of gains in the S&P 500 are not similar historically to returns dating back to the 1930’s. In fact, it is more typical that the index is up over 10% in “up years.” But let’s face it: Our memories are short. And if sometime in the next three years the stock market is down 10% or even 20% for one or more years in a row, most investors are not going to google “year-to-year returns on the S&P 500 dating back to 1930” to give themselves peace of mind.
On the radio this week I heard major – and very smart – financial news reporters expressing utter frustration that stocks are UP so much in 2017! Why the dissatisfaction?! What is wrong with 401k accounts, IRA and stock portfolios being up 10%, 12% or even 20% after expenses year-to-date?!? What is wrong is that really smart psychologists tell us that we are creatures of habit, our memories are short AND that losing something (or having something taken away) is far more powerful than being given or gaining something.
So, most investors feel good today.
Most investors are happy in this and recent years with their seemingly easy portfolio gains (if they are invested mostly in stocks).
Most investors will likely be really freaked out when and if their portfolios go down, especially if they decline over 5-10% and remain down for an entire year – or more.
There is no telling exactly when the markets will decline or by how much or for how long. And there is also no telling for how much longer markets may enjoy upside momentum and gains. Factors currently posing downside risk to stock prices include higher interest rates from the Federal Reserve more of which are said to be coming but are dependent on a slightly strong economy (largely unpredictable), consumer preferences (unpredictable) and measures of inflation (largely unpredictable). What is more predictable is that as human beings we are wired mostly to get extremely anxious when something is taken away from us.
- Have a conversation with a professional who can illustrate a scenario – tailored to you, your family and your lifestyle – that can reduce the inevitable anxiety of a short- or longer-term market decline.
- Have a conversation about how much cash you prefer to have on hand, and then round UP.
- Understand what you own in your portfolio and how much you have gained over the past several years.
- Understand how much a 10% or 20% decline means IN DOLLARS to your portfolio.
Finally, have an asset allocation that addresses all of these factors. And don’t be that blind squirrel!
Thank you for reading and TGIF! …And stay tuned for “Top 10 of 2017!”