As I talked about in my previous post on Market Timing, I start out by stating that the majority of us are and should be investing for the long term. Long term meaning expected retirement dates 10, 20, or 30 years out. I say this again now, because I think it’s important to look at the market history over a short time frame vs a long one to show that the recent events, albeit scary, are right on track with history.
If anything, the recent extended bull market may have been the outlier.
What may look like extreme stock market volatility on the micro level is really just a small short term blemish on the trajectory of the overall stock market since its inception.
I realize that living through it now and physically watching your portfolio drop by tens to hundreds of thousand dollars doesn’t make it seem like no big deal. But when we zoom our reference point out, we see that it may not have been as scary as it felt during that time. But let’s explain.
A Short Term Market Viewpoint
The market, as we have seen and felt the last few weeks, is volatile, sporadic and unpredictable. It dips and rises each hour making it impossible to guess or time. We truly have no idea what it is going to do next, it may dip into a long recession or we may have already been through the worst of it. We just don’t know.
Below is a graph of the S&P 500 index fund for the day of 03/23/20
As you can see, when we zoom in to the day level, the graph is all over the place. Rising and dropping. Unpredictable even to the hour.
What we do know, is that the market has dropped within the last month+ and it has dropped a lot. The S&P 500, an index fund that tracks the market, fell to around 2,250 points at the time of writing this (3/23/19), which at its previous high was nearly 3,400 (2/19/20). Representing a drop of over 34% in just over a month. Which is right on pace for what the Dow has done during this span as well.
VTSAX, the index fund that I currently invest in and the index fund I recommend to others is down from a trading high of $83.79 to $54.49 which again represents a 35% loss.
Below are graphs of both the S&P 500 and VTSAX over the last month
Not great. These graphs show us just how dramatic of a drop the market has truly had over the last month or two. So, it’s no wonder my portfolio has dropped over $40,000. I am nearing the point of having to resign from the six figure club … Sad. Just when I was starting to feel at home here too.
However…
What if I told you I could predict what the market will do??
What if I told you, that I could make you a lot and I mean a lot of money because I already know what is going to happen with the market? Would that be something you were interested in? I know I am. -Me
“But wait, didn’t you just get done posting 3 seperate, extremely long winded posts stating that no one knows what the market will do and that anyone who says they do is just guessing/gambling??” -All of you
I did say that. But with 100% certainty, right now, I promise that I can tell you what the market is going to do. And when it happens, it is going to be awesome for all of us that are still invested! -Me
“So, what is it?” -All of you with excitement, but more than likely annoyance that I am dragging out my point so long
The market is going to go up -Me
*rolls eyes -All of you
I didn’t say when it would happen, I didn’t say when! -Me
A Long Term Market View
I can hear your groans. However, I’m right about every point I made. Since the inception of the stock market, it has always gone up. This has never failed, not even once.
It might not go up every month, or every year but it has always gone up.
After the Wall Street Crash of 1929 the Dow Jones lost 46.6%, the Great Depression lost 42.6%, World War 2 lost 23.2%, the Tech Stock Crash of 1970 lost 18.7%, Black Monday lost 22.6% in a single day, the Dot-com bubble lost 31.4%, The Great Financial Crisis from 2007-2008 lost 53.7% and countless others, the market has always went up. Always.
And it hasn’t just gone up some, it has gone up to reach new market highs each time it has bounced back up. For example, if we look at the Dow prior to the 07-09 crash it was roughly 13,895, following it’s crash it dropped 53.7% down to around 7,000. From that point on, it went on to grow to 28,538 this past December. Quadrupling it’s returns from the bottom but still over doubling it’s gains from the peak prior to that recession.
Since its inception, the stock market has gone up about 3 out of 4 years, meaning that 75% of the time the market is making you money. And I like those statistics. So you can see what I mean when I said that this past bull market may have been more of the outlier than this recent drop.
Below are graphs of the S&P 500, and VTSAX since their inception
So you can see when we look at these graphs from a macro level/birds eye view, we see that this drop is just a normal wave on the market’s trajectory.
Even when we look at the last 10 years of the average closing price of the S&P 500 in chart form, we see a lot more green than we do red.
Close up the market looks very volatile and dangerous but when we take a step back the graphs end up looking very linear and safe in nature.
Why doesn’t that look as scary as the short term graphs?
Was it because I put the short term graphs in scary red? Maybe, but really, it is because the market is safe. It’s safe in the long term. Yes, on the micro level the market is dangerous and volatile and something I don’t mess with. It scares me too. But in the long term, it’s just a casual ride to wealth.
And I can prove that too.
Since inception, the S&P 500 and VTSAX have returned approximately 10% annually for investors with 7% being the conservative number most use to calculate their projected retirement age.
So even with all of these historically bad market crashes where there have been years just like this year where investors have lost well over 30% of their portfolio, they have still averaged a 10% annual return on investments over the long term.
And a 10% annual return on your retirement portfolio is more money than most of us know what to do with as long as we don’t get scared and pull our money out of the market.
The market always goes up, and it will go up again after this crash and the crash after it, just like it has done throughout history.
Conclusion
If you believe in the United States economy which as I have shown has nothing in it’s track record to say that you shouldn’t, then you should assume that the stock market will go up again this time as well.
So stick with your plan, keep your money invested and weather this storm just as investors have done through the many recessions before this one. The only way you will crash and burn is if you attempt to sell your portfolio and time the market. Let’s ride this thing back to the top!
As always, feel free to comment below with any questions. If you have any specific questions feels free to email me directly at fiscaltherapist1@gmail.com
