While researching data for this column, the first article I came across was one written by Matt Kranitz for USA Today back on February 1, 2007, before the great recession. In hindsight, the title of the article “Investing is very much like gambling. The big difference is time” (in conjunction with the date), is much more important and instructive than the actual contents of the piece.
On February 1, 2007 the Standard & Poor’s 500, the 500 largest publicly traded companies domiciled in the United States, representing approximately 85% of the total stock market capitalization, closed at 1,445.94, only to then plummet 769.41 points or 53.21% to 676.53 over the next two years (March 9, 2009). It wasn’t until the close of business on September 13, 2012 that this index recaptured that prior high, closing at 1,459.99. The S&P 500 closed this past Wednesday (5/24/17) at a record 2,404.39.
The moral of the above matches exactly the title of this column, borne-out by the fact that from February 1, 2007 thru this past Thursday the S&P 500 has returned a total of 67.18% or an average of 5.11% per year, not including dividends – this over a period that includes one of the worst bear markets in history. If we add in dividends the figure would jump to approximately 7.00% per year. Not too shabby.
These numbers, as well as a wealth of additional empirical data, supports the belief that, unlike gambling, where the chance of winning diminishes as time passes, the odds of positive investment returns from investing in equities actually increases as time passes.
Unfortunately, too many investors react to headlines, which results in them being whipsawed by periods of greed followed by periods of panic. It’s no wonder that, according to a study by DALBAR, a company that develops practice standard for the financial services industry, the average U.S. stock investor has trailed the market by anywhere from three to seven percentage points per year over the past 20 years. To put this into perspective, over the 20 year period ending December 31, 2016, $10,000 invested in the S&P 500 would have grown to $439,334. The same $10,000 invested by the average investor over that same time period accumulated to only $254,916. The numbers don’t lie! The cost of responding to fear and greed, rather than establishing and maintaining a long-term investment strategy, can be substantial.
We recommend that you become an investor instead of a traders. Don’t concern yourself with what will occur in the stock market over the next week, month or even quarter. Rather, concern yourself with what you believe will be the direction of stock prices over the next one to three years. Become an investor. Tune out the “halftime report” of each trading day. Tune off “market wrap.” Tune off news teasers like “you can’t afford to miss these earnings releases.”
Also, make sure you diversify your holdings across four to six different industries. This will allow you to be able to weather any unexpected downturn in a particular sector.
It’s also important to realize that you won’t be right all of the time. The important factor is to be right over time. Once again, don’t appraise your portfolio on a daily basis. It becomes not unlike weighing yourself every day. You will never be happy, eventually become exasperated and give up. Measure your performance versus appropriate indices over time and recognize that you will make errors.
What matters during periods of consolidation is that you emerge with the right portfolio. Simply put, when evaluating your portfolio you must assess the potential of your holdings in relation to the recent results. For example, do you own companies with earnings growth potential? Do you own companies that are increasing their share of the market? Do you own companies with a proprietary product or service?
Continue to dollar cost average, investing on a systematic basis through your company sponsored pension plan such as 401(k) or 403(b). Assuming that you are allocated appropriately between stocks and bonds to meet your long-term objectives, it is imperative that you do not make major changes to your investment patterns during periods of market downturns.
Finally, upgrade your portfolio to industry leaders. Do not accept the marginal investments that you may currently own. Trade up.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial adviser. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial adviser prior to making any changes to your portfolio. To contact Fagan Associates, Please call 518-279-1044.