Bad Years Happen
Last week's drop in the Dow had many investors losing sleep and wondering if they should get out before things got any worse. Living through a bad market may be painful, but it's nothing new. As long as you are investing for the long term with money you don't need in the short term -- nothing to worry about.
By Ann Coleman (TMF AnnC)
October 16, 2000
By now, so much has been said about what a bad month October is for stocks, that I wonder if the October jinx is becoming a self-fulfilling prophesy.
Let's not forget that the full quote from Mark Twain is: "October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February."
After last week's sell-off and the anemic rise on Friday, we are seeing much wailing and gnashing of teeth, not to mention buckets of self-doubt, hours of insomnia, and a fair amount of looking for someone to blame. Face it, folks, we're having a bad year. They happen.
After five years of double-digit returns for the S&P 500, and nine years of positive growth, the market is weak this year. Is anyone surprised?
The surprise would be another double-digit year.
We've gotten used to staggering returns, but that hardly means they are guaranteed. It's been nine years since we had a market that closed down for the year. (In 1990 the S&P 500 was down 3.17%.)
Will we end this year down? Will it matter? (The calendar year is a pretty artificial designation.) I rather hope that the broad markets do end up in negative territory this year. I've gotten tired of waiting for the other shoe to drop.
Some of you are hyperventilating right now, or mentally reaching for my neck. Relax. I certainly am not wishing a loss of money on anyone. That Foolish Four Portfolio down there, the one that is showing a negative return since it started 21 months ago, is my money. And my other investments tanked rather brutally last week, too.
I'm pretty sure I hate losing money just as much as the next guy. The thing is... I haven't lost money. Yes, if I had sold on Thursday I would surely have lost money. But, so far, I only have paper losses. I hope you can say the same.
Let's consider the market as a whole. Average annual growth of 19% (The S&P 500's average from 1995-1999) is not sustainable. Yes, we have peace (more or less), increased productivity, amazing technological developments, low inflation, baby boomers pouring money into stocks -- all of the right conditions for a great market. But, let something go wrong -- in fact, let something look like it might be going wrong -- and the market reacts like a bulked-up athlete being handed a plastic cup.
We're all long-term investors here, right? We have no money in the market that we anticipate needing for at least five years. We all understand that markets go down as well as up, but believe that the long-term trend is always up. So, what's the problem?
Getting in a dither over market machinations won't help. Tossing and turning in sweaty sheets just annoys the cat (or whomever shares your bed). Selling your stocks certainly won't help -- that will just lock in your losses and remove the possibility of benefiting from the recovery.
What recovery? The RECOVERY! The one that always follows bad years. Sometimes it takes a year or two, but it always comes. OK, sometimes it takes longer than that. It took decades for the market to return to its former high point after the 1929 crash.
Digression: We've all seen that statistic, but what does that mean? Does it mean that most investors were in the red for all those years? Nope. It means that anyone who invested all of their money, at one time, in the whole market, at the very top of the market, would not have reached a breakeven point for about 20 years. Folks who started investing well before the crash, or had some cash to invest after, fared much better.
There is little doubt that if we are headed for a global depression, things will get grim.
Do you really think that's what's happening? OK, some of you are saying, "Yes!" I remember feeling that way myself in the late '70s and early '80s. Inflation was 15% per year, the country had just been brought to its knees twice by oil shortages -- and we all knew it could happen again. Iran was holding Americans hostage, and Russia was "the Evil Empire," threatening to destroy us.
Things got better. There was no meltdown, no global catastrophe, not even a serious recession. If we got through that, I think we can get through the market's reaction to overpriced tech stocks and its nervous anticipation of problems that are very likely to be less bad in reality than in anticipation.
Markets hate uncertainty. That's probably why October has such a bad reputation. October is followed by November, which starts off with election day. If the market is going to get pre-election jitters, it's going to be in October. Add a little uncertainty about oil supplies, war in the Middle East, or the possibility that deficit reduction won't be the next president's top priority, and you get a very nervous market. Not an unhealthy market, just an easily spooked market.
So, am I losing sleep because my portfolio is losing money? No. I have sympathy for those of you who are, but the cure for this insomnia is to invest responsibly and think long-term.
Repeat after me: Bad years happen, bad years happen, bad years... zzzzz...
Fool on and prosper!
