The Trump administration was widely expected to usher in an era of unprecedented disruption, and it has exceeded those expectations. For investors, that has meant a bumpy and, at times, frightening ride this year. By early April, the market was down –15%. As of this writing, it has bounced back and then some. (Who knows where it will be by the time this piece is published!)
Same song, different band
If you had fallen asleep on Feb. 19, 2020, didn’t wake up again until Dec. 31 of that year, and then checked on the stock market, you would have thought it was a wonderful year to be an investor. The market ended the year up more than +18%. You would have slept right through the unnerving –34% drop that took place over the 16 trading days that followed your Feb. 19 bedtime. The market had never fallen that far that fast.
This year’s roller coaster hasn’t been that interesting, but it’s been quite a ride nonetheless. Still, if you had hit the snooze button on New Year’s Day and didn’t rise from your slumber until about now, you’d have thought the markets have been snoozing as well.
What markets do
Fortunately, wild swings in the market are not every-quarter occurrences. But they aren’t uncommon either. That’s why, as we preach again and again, investing requires a long-term perspective. A two-dimensional approach to your personal risk tolerance helps significantly as well. (More on that in a minute.)
In our May cover article, money manager Barry Ritholtz described what has become a routine occurrence when the market falls. “The phones ring with reporters wanting a comment on the volatility. ‘What’s going on in the markets?’ they say. My response is always the same: ‘You won’t like my answer: This is what markets do — they go up and down, sometimes violently.’”
When markets move strongly, the headlines come fast and furious. During this year’s big dip, investors were treated to these pronouncements: “Dow Plunges on Trump’s Tariff Announcement,” “S&P 500 Briefly Enters Bear Market,” and “Oil Prices Sink Amid Recession Fears.” Writing dramatic headlines in a quest for attention — this is what the media do.
Investor, know thyself
It’s one thing to consider your risk tolerance when the markets are calm. But it’s something altogether different when the markets get volatile. The next time the market tumbles, check your reaction. Are you taking it in stride, or not? If you’re feeling unnerved, the risk level of your portfolio may be set too high.
However, there’s an important second dimension to the risk tolerance conversation. Every investor has to be willing to take some risk. That’s the nature of investing. You can’t say, “I want the market’s long-term average annual return, but I prefer to keep all my money in cash.”
Investing requires some intestinal fortitude, which is built through a combination of live-fire testing and knowledge of market history. Every downturn you live through, as well as the eventual, inevitable recovery, should better equip you for the next one. And every bit of knowledge you add to your investor databank, such as the fact that the long-term average intra-year market decline is –14% from high to low, should better equip you for the next downturn as well.
Get ready
President John F. Kennedy said, “The time to fix the roof is when the sun is shining.” For investors, the time to commit (or recommit) to following your plan come what may is when markets are calm. Even better to jot it down as part of a written investment plan: “I have chosen a strategy I can live with in good markets and bad, and so I will live with it in good markets and bad.
Then, when the next sharp decline comes, when you feel that old familiar fear, when you wonder how much worse it may get, when you catch glimpses of headlines saying to run for the sidelines — when all of that happens, as it certainly will, pull out your written investment plan, re-read it, remember who you are (a long-term investor, not a short-term trader), and go on about your life.
Market-related noise can be full of sound and fury, but for those following an objective, process-driven plan suited to their time frame and risk tolerance, it signifies nothing.
