Wow, what a week! While January felt a little like we were all aboard Elon Musk’s Tesla that was recently shot into space, investors were brought abruptly down to earth over the course of last week. All said and done, all 3 major US stock indexes are now slightly negative so far for 2018, erasing all of the strong gains enjoyed throughout January. A shock like this typically leaves investors searching for answers as to why this happened, and what the exact causes were. Although we can point to the headline investor fear of the potential of rising interest rates, we would venture a simpler explanation: it was simply time for a breather. As we have said to any of you that have sat in our offices over the last few months, although the economy is looking robust, the stock market was (and still is, we believe), overvalued. When a market is expensive and priced for perfection, there is little room for error, and even the smallest reduction in confidence can cause nervous investors with their fingers on the sell button to finally press it.
We have shown you this chart before, but it is especially relevant after a week like this. Before you take one look at this chart and zone out, believing that it is too complicated for a weekend read, let us explain what it illustrates, and the important take away for all investors. It shows the fascinating statistic that, on average looking back to 1980, the average drop within any given year has been 13.8%. As an example, in 1980 (far left bar), the red dot showing -17% is the amount that the market dropped within 1980, even though it ended the year with a positive 26% return (the grey bar). This is a significant range to tolerate as an investor, but it is part of investing in the market. In fact, out of 38 years, 29 have ended the year positive, despite large drops within the year. The takeaway: markets drop and correct regularly, and it is a normal and expected part of the stock market’s cycle.
Whatever happens this week, here are some practical tips for reducing stress:
- Turn off the TV and spend less time on the financial ‘news’ sites.
- Refocus yourself on your long-term financial goals
- Recognize that the stock market goes down, as well as up.
- Take comfort in knowing that your accounts at SCG are designed to reduce volatility and insulate you against the full wrath of the stock markets’ volatility.
- Please call us before making any emotional investment changes or decisions
Feel free to contact us at any time, and let’s hope for a better week!