Author: Darrell R. Tierney CFP® CPA PFS
“Let’s get out until things get back to normal.”
We’ve heard from people wanting to sell their stock market holdings and get back in later, when things “calm down.” They don’t want to take that long ride down. As I’m writing this (February 11, 2016), the S&P 500 is down 11.47% since January 1, 2016.
Is this year’s market decline unusual? The ride certainly feels bumpy. I believe this is garden variety, business as usual, volatility. According to J.P. Morgan’s Guide to the Markets® U.S. 1Q 2016 (the Guide), since 1980 the average calendar intra-year market drop is 14.2%. So we’re not even at average yet!
The Guide also shows that despite the 14.2% average decline, for the last 36 calendar years, the S&P has had positive returns in 27 years and negative returns for nine. Does this mean, despite the market drop since January 1st, the year will end on a positive note?
This could well be the start of a bear market or it could be a great year. I have no idea. Further, I don’t think anyone else does either. In my opinion, the question to ask isn’t where will the market be at year end; it’s where will the market be in five or ten years?
According to J.P. Morgan, since 1950, the S&P’s worst calendar year decline was 39% and the best calendar year return was 47%. That’s a large, scary range. But let’s look at average returns for rolling periods from 1950 to 2015:
Five years -3% 28%
Ten years -1% 19%
Twenty years 7% 17%
This tells me that money needed in the next five years doesn’t belong in the stock market-there is just too much short-term volatility. But history also tells me, for money I need in five years or more, there isn’t as much risk and some nice upside. We know that the past does not guarantee anything about the future, but I also believe that short-term and long-term stock market risks are very different.
So my advice is to keep your eyes on the horizon and don’t let the short-term noise drown out the long-term opportunity. History is on your side.
1. J.P Morgan’s Guide to the Markets® U.S. 1Q 2016
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