“In the old legend the wise men finally boiled down the history of mortal affairs into a single phrase: ‘This too will pass’” – Benjamin Graham
The Stock Market Pulls Back
This week, markets pulled back in a noticeable way. The S&P/TSX Composite Index finished down 3.3%; the S&P 500 was down 3.9%; the Dow Jones was down 4.0%. These are not-insignificant declines. We all know that markets will go up and down as part of a normal market cycle, but it is easier to stomach when markets are advancing positively, and a tougher pill to swallow when markets retract.
But it’s true.
In a way, 2017 spoiled us because there was almost no meaningful market pull back during the entire year. In today’s faster-than-ever world, a week can feel like forever, let alone almost a year. 2018 has certainly brought as back to the reality of normal market ebbs and flows. Still, we are now almost 10 years into a bull market that began in early-2009 – read Anthony’s timely Fall 2018 E-Newsletter Article, Q3 2018: The Longest U.S. Bull Market In History.
When will markets fully correct? Is this week’s mini-pullback the start of a longer and more sustained correction? It’s impossible to say for sure. Analysts feel that the current bull run has about 18-36 months left in it. At You First, we feel that this window is appropriate, based on a variety of metrics. Even when the eventual market pullback does occur, history dictates that the market recovery to follow will vastly exceed the previous pullback on a percentage basis.
Consider the following: the average S&P 500 market decline following a market peak since 1946 has been about 34%. This number seems daunting and scary, but the market recovery following the market trough has been 145%. These figures do not fully take into account the current market expansion since March 2009 (where the S&P 500 has roughly tripled to-date).
The Value of Time
The important thing here is remaining invested. Investors who attempt to “time the market” generally are too slow on the uptake and end up selling low and buying high. Missing just the 10 best days of a market recovery can be devastating in the long-run. Investors who remain invested throughout a market pullback – and if they have the available funds, buy the dips – tend to be handsomely rewarded in the long-run.
One underused by overly-important concept when investing: “Time is more power important than timing”. To illustrate this, let’s look at the performance of Canada’s own TSX Composite Index.
Between 1960 and 2017, there were 42 occurrences of a positive calendar year return, compared with 16 occurrences of a negative calendar year return (about 72% of calendar years were positive). The best 1-year return was 44.8%, while the worst 1-year loss was 33.0%.
Over the same timeframe of 1960 through 2017 but now looking at 3-year rates of return, there were 48 occurrences of positive 3-year returns, compared with only 8 occurrences of negative returns over 3 years. The 3-year positive return rate is 86%. The best 3-year timeframe yielded a 34.7% return compared with the worst 3-year timeframe of -6.3% loss.
5-Year Rate of Returns over the same timeframe? 98% positive, with 53 5-year timeframes yielding positive returns compared to just 1 5-year period (1970-1974) in the negative, and that negative was only -0.3%. Compare this with the best 5-year return of 24.6%.
You can see how over time, the occurrences of negative returns is reduced significantly while not affecting the potential for positive growth by nearly the same measure.
6 Investing Tips for Stock Market Declines
The New York Times ran an article in early-2016, as markets were in the midst of a mid-teens decline. The article, aptly named 6 Tips for Investors When the Stock Market Tumbles, succinctly details why the stock markets pulling back isn’t as bad as it might feel at the time. Here, briefly, are the 6 points from the article:
1. You are not the stock market: mostly likely, you have a diversified investment mix consisting of equities but also fixed income (bonds) and cash, real estate, etc. It is rare for everything to fall at the same time, so likely the numbers you see on the stock market charts are not reflective of your portfolio.
2. You have likely done very well in the market runup prior to the pullback: Over the long-term, your gains will generally outweigh the period of decline by a large margin, IF you remain invested. Research has shown that missing the 10 best days of a market recovery will have dramatic, negative, results on your long-term portfolio. Stay invested!
3. Your Goals Remain Unchanged: In the past, prior to this recent pullback, you made a logical, rational decision to put a long-term plan in place. The plan is designed with just such pullbacks factored into the equation.
For instance, during your annual review meetings, we tell you that we target an average annualized return of x%, depending on your specific situation. Let’s say the target return is 6%. There will be some years your portfolio is up 15%, some where it is flat, and some where it may be down 10%. The key is the word “average”. Over the long-term, the jagged-looking ups and downs will smooth out in a steady, gradual inclining direction.
There is nothing happening during the current pullback that is “new” or “never been seen before”. The fundamentals of capitalism are unchanged, so there is no reason to change your goals or confidence in your plan.
4. Most Investors Have Time To Recover Their Short-Term Losses: Unless you have a short-term time horizon for complete redemption of your portfolio, you will have plenty of time to recover (and indeed, “buying the dip” can really pay off in the long-run). Those who do have a shorter time horizon for their funds are likely already in a more conservatively allocated portfolio (see point 1 above).
5. Some People Can’t Handle Stock Investing Stress: This point could be pointing at you, but not necessarily. Consider the alternative returns you can reasonably expect with safer investments like GICs, Bonds, or Treasury Bills. There are simply not a lot of investment options that can offer the returns that stock market exposure can.
6. Note To New Investors, This is What Markets Do: There is nothing unusual or abnormal about these recent events. Going back to Anthony’s article from this past February, the average stock market experiences a 5% drop three times per year. These types of mini-corrections, and even larger and more sustained market pullbacks, are a part of a normal, healthy market cycle.
Frank’s article from the Fall 2018 E-Newsletter, Late-Stage Investing – Protecting Against A Pullback, highlighted some tactics that can be employed within a portfolio to take some risk off the table while remaining invested.
If you have questions or concerns about your portfolio, let us know. We are happy to book a meeting to discuss the specifics of your situation in more detail.
Changes to Fundex Nominee Fee-Based Program
Fundex mailed a letter to Nominee account holders regarding changes to their fee-for-service (FFS) platform. The changes will allow for more autonomy and flexibility to the FFS program. We want to assure all households that the fees themselves will remain the same. These changes are administrative in nature.
Should you have any questions about the changes to the fee-based program, please contact our office.
Sources: You First Financial, New York Times, Dynamic Funds, Fidelity
This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.