This Market Is Normal, Here's Why
- Feb 2, 2016
- 2 min read
Your January investment statements are about to arrive. Chances are you're going to experience some type of emotional response. It's not going to be the positive kind.
As of 10:45 AM mountain time this morning, US stocks are down a little over 7%. Your international investments are in the red by an even wider margin. There's no doubt a globally diversified portfolio is off to a rough start.
There is a lot to celebrate though; cumulatively, stocks are up 222% from their March 2009 low point and the majority of the time a losing first quarter turns into a winning year*.
Check this out- in 37% of years since 1926, the market churned out a negative first quarter. Of those years, 55% of the time the market finished in positive territory. In fact, one of those years (1933) the market earned 54% for the full year!
To quote Dumb & Dumber, "So you're sayin' there's a chance".
Absolutely. In the case of stocks, over half the time a crappy first part of the year doesn't equate to a crappy 12 months.
Even though the market bears have come out of hibernation, there's still a ways to go before we can legitimately start using words like recession.
Looking at the total US Stock Market represented by an initial investment of $100,000 in the Vanguard Total Stock Market ETF (ticker: VTI), I think we're still in a "normal" range of returns at this point.
The diagonal range shows as of today, the market is still trending within the historical range since the Great Recession.
Further evidence that recent market returns might actually make sense is the lower threshold. For over a year, the market has met resistance at current pricing levels four times. Only if the market busts through that lower threshold do we really begin our stopwatch to track the beginning of a potential recession.
Hopefully my chart helps you cringe less when that January statement arrives. If it didn't, shoot me an email and tell me why. Most of my clients say I'm at least halfway decent helping them see the big picture. If I could help you stay calm and avoid a potentially damaging portfolio mistake, that's a huge win!
If you were thinking you should be doing something right now, there is an option; Go Buy More Stocks. During market drops such as this one, a lot of wealth is transferred from panicked sellers to sensible long term investors.
Let's all commit to being the latter.
* Swedroe: Keep Calm And Step Forward, Larry Swedroe, ETF.com, 1/13/2016. Author uses S&P 500 data.
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