Streetwise for Friday, June 23, 2017
Although the financial markets have been on a definite upward trend since the beginning of the year, it has not been nor will it continue to be unusual for the Dow Jones Industrial Average to transverse large point swings in a single day. Not to be outdone, the VIX, also known as the Street’s fear gauge, often oscillates between peaks and valleys as it tracks a trading day’s volatility.
The problem is not so much the degree to which the equity indexes rise or fall. Rather it is the Street’s prognosticators. Whenever the level of uncertainty begins to rise, out they come promulgating the supposition that the risk of investing in equities outweighs the potential returns.
Such comments are not just misleading, but are dubious at best and at worst they are simply wrong. It takes very little ingenuity to postulate a biased set of circumstances in defense of a strategy or position.
The procedure is simple. Extend the historical data under consideration back far enough in time and you can always segregate out periods when things went well. And you can just as easily find periods when things did not go so well. However, such statistics will have virtually no bearing on your portfolio’s performance.
Time, not timing, is the key to portfolio growth. Consider an example I use in teaching students. Assume an investment of $10,000 in the Dow Jones Industrial Average between January 1, 1999 and December 31, 2013, a fifteen-year period. Notice that I have included the worst financial period of my lifetime, the year 2008.
If you stayed fully invested throughout the 15-year period, your total return would have been 6.46 percent. However, if you happened to miss the market’s best 10 days during that period, your return would have declined to 2.10 percent. Miss the best 20 days and you chalk up a negative 0.89 percent return.
Even during a bull market, it is not unusual for some investors to chalk up negative returns. Likewise, positive returns can be achieved when the markets have a glide path like that of a brick. Having analyzed countless portfolios over the years, I can personally attest to the validity of those statements.
Peter Lynch, the former manager of the Fidelity Magellan fund said it succinctly in his 1989 book, “One Up on Wall Street.” Lynch wrote, “I’ve always believed that investors should ignore the ups and downs of the market and remain fully invested.”
And many before Lynch reached the same conclusion. Famous British economist John Maynard Keynes once commented that from time to time it is the duty of a serious investor to accept the depreciation of his holdings with equanimity and without reproach.
Periodic declines in the stock market are as inevitable as are rallies. While it is impossible to predict market direction, a decline should not equate to panic. Never hold a fire sale of your investments, even if certain media commentators say otherwise.
Benjamin Graham deftly pointed out in his well-known book, “Security Analysis,” that your investment strategy should always be to select only quality companies in which you desire to become a partner. Keep in mind that “Security Analysis” was first published in 1934, a time when the public faith in the stock market had all but totally collapsed.
Graham was also given to write, “The processes of the stock market are psychological more than arithmetical.” This meant that the impact of market psychology ensured that stocks would, at any given time, be either undervalued or overvalued. Furthermore, according to Graham it is possible to distinguish between the two in rational manner.
Nonetheless, investors are continually encouraged to move in and out of the market or in and out of specific stocks, all in the name of market timing, and with the encouragement of so-called “experts” and their sanguine analysis.
That so-called analysis amounts to nothing more than pernicious, albeit influential, nonsense. As Peter Lynch once said and I have quoted many times, “Far more money has been lost by investors preparing for corrections than has been lost in the corrections themselves.”
Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.