Investors should be of good cheer! The long-term, “secular” bull market in U.S. stocks that began in March of 2009 continued as diversified portfolios of both stocks and bonds performed very well last year. Even international stocks piled on with some gains.
The years 2018 and 2019 are an interesting case study on why you probably shouldn’t get too focused on “the economy” to make your investment decisions. The economic data points were generally positive in 2018, yet stocks dropped 20% at the end of the year. Meanwhile, the data points were more mixed in 2019, yet U.S. stocks rallied strongly. And the media delights in delivering every piece of negative news to you.
While data is important, investor psychology is arguably more important in dictating the length and depth of market cycles. I continue to believe that the last two recessions of 2000 and 2008 (and deep declines in the S&P 500) have left a deep scar in the minds of investors, and this has set the stage for our current, long-running bull market.
Here are some fundamental investment principles that might help keep you focused in 2020.
A successful investor focuses on reaching financial goals set within the context of a financial plan. While performance, fees, and taxes are certainly important, the successful investor understands that emotions and behavior around investment decisions are the primary determinants of investment success. Therefore, he or she is keenly focused on his or her deeply-held personal, financial goals. With this in mind, he or she is more likely to stay disciplined and patient – and less likely to “misbehave” by allowing emotions to impact investment decisions. Trying to time the market, react to the “news”, or do anything else that diverts one’s attention away from financial goals is risky.
The financial media is not your friend – consume it at your risk. According to Dalbar, the average investor significantly – and consistently – underperforms because investors tend to make emotional decisions causing them to buy and sell at the wrong times. The media stokes these emotions.
Staying invested through the inevitable ups and downs of markets is the only way I know of making sure that we capture 100% of the upside when markets rise.
By my count, there have been 15 “bear markets” since WW II – about 1 in every 5 years. The average depth of these bear markets was a 30% drop in stock prices. The level of the S&P 500 was 18 in 1945 and is approximately 3250 today. And this doesn’t include dividends.
Risk is commonly defined as the probability that stock prices will fall. I would ask you to consider a different definition, which is this: risk should be defined as the probability that a family will not reach their financial goals. Investing within a financial plan should have the exclusive goal of minimizing that risk.
Bull markets do not die from old age. They generally die from excessive risk-taking and euphoria – or fear of missing out. Last year, individual investors pulled a record amount from stock mutual funds and ETFs (exchange-traded funds) while adding significantly to bond funds. Investors clearly haven’t forgotten 2008 (or 2000-02). Pulling record amounts from stocks during a fabulous year is not exactly euphoric-like behavior. This might be a glorious contrarian indicator that could be telling us we still have a long way to go in this bull market. It’s worth remembering that the 1982-2000 long-term bull market started at 102 and ended at 1527 (S&P 500 index). That is almost a 15x increase (and does NOT include dividends). The current bull market that started in 2009 at 676 is currently around 3250 – about a 4.8x increase.
Bottom Line: Be of good cheer. Stay patient, stay disciplined…and stay invested.