Last December, if you caught the news at all, you couldn’t help hearing how poorly stocks were doing. For several weeks the volatility seemed to be fulfilling the dire predictions of every market doomsayer.
However, it’s one thing to hear about market fluctuations on some distant trading floor and quite another to open your quarterly statement to see the declining values reflected in dollars and cents.
If you care about your financial future, it’s almost impossible to look at the performance graphs headed in the wrong direction and not feel at least a twinge of emotion. For some, these negative feelings were so overwhelming that they sold assets just to “do something” about the situation.
How Bad Was It?
According to Marketwatch, the 4th quarter of 2018 saw the S&P 500 lose 17.1% of its value from the previous new market high. According to their calculations this made October through December of last year #14 on the list of worst performing quarters since 1926.1
However, to get their article out before Christmas, Marketwatch looked at the S&P 500’s performance only through December 21st. If they had waited a week, they would have been able to include the 3% gain right before the close of the year. This would have improved the 4th quarter of 2018’s ranking—a small consolation for anyone experiencing double-digit declines.2
But every cloud has its silver lining.
Marketwatch then looked at S&P 500 performance for the years following those historic down markets. The thirteen worst quarters were followed by one year gains averaging 25.6%. The three and five year averages were even better.
And when they analyzed from 1940 to the present (removing the anomaly of the Great Depression), the following one year gains of the S&P 500 Index dipped slightly to 23%, while the three and five year gains increased significantly.
Earning Your Lunch
Economist Burton Malkiel is famous for saying that in the stock market “There ain’t no such thing as a free lunch.”3 He meant that if you want to realize long-term gains, you must expose yourself to extended periods of risk, often experienced as downward market price volatility. Even so-called safe investments like bank CDs carry the risk of losing money by not keeping up with inflation.
A productive way to think of 2018’s disappointing last quarter is that long-term investors simply paid for their lunch. Quarterly losses are simply to be expected when pursuing the above-inflation returns the market has consistently paid over longer time periods.
As bad as it was, the end of 2018 didn’t compare with the corrections of 1987 or even 2002. In fact, as of this writing, the S&P 500 Index is significantly up from its December lows. Of course that data point could change again tomorrow. But we’re reminded once again of this universal truth: the best way to take a temporary decline and turn it into a permanent loss is to sell.
As quarterly and year-end statements arrive they will likely look different than they have for the past several years, remember that periods like these are unavoidable because there is no free lunch. In order to benefit from the upside of market volatility, investors have to bear downturns in the market as well. Your trusted advisor is the best resource for guidance and reassurance as the markets dish out new circumstances. Be sure to reach out if you have questions or concerns.
Citations
1-https://www.marketwatch.com/story/heres-how-the-stock-market-has-fared-after-similarly-brutal-losses-in-a-quarter-2018-12-24
2- https://www.cnbc.com/quotes/?symbol=.SPX
3-A Random Walk Down Wall Street, Burton Malkiel