My kids love to read and sing songs. One of our favorites is “We’re Going On a Bear Hunt,” a 1989 children’s picture book about a couple kids and their dog going out to hunt a bear, having to travel through grass, a river, mud, a forest and a snowstorm before reaching the dark and scary cave. At each obstacle, the refrain goes like this:
We can’t go over it. We can’t go under it. Oh no! We’ve got to go through it!
Folks, unfortunately, it appears that we as investors are in the middle of a bear hunt right now (I assume you have heard the stock market references to good times as “bull markets” and bad times being “bear markets”). Stock market losses are never comfortable, and never feel good. And after a year like 2017, devoid of any volatility, 2018 has certainly been extremely choppy. But like the book says, we can’t go over it, under it, or around it – we have to go through it.
Preventing my clients from bailing out of a diversified investment plan during a scary market is my single most important job as a wealth manager. And here’s why:
- According to an annual study done by Dalbar, which attempts to find out how investors did compared to the average investment (spoiler alert: investment returns are not the same as investor returns!), for the 20-year period from 1998 to 2017, the average annualized investment return* was 7.2%. The average investor return was 2.6%. That’s shocking!
Why such a great divide?! It’s not skill or some sort of secret formula to picking the best investments. It’s not even about taking more risk (bonds annualized 5.0% during that same period). The only other explanation I can come up with is… behavior. Fear. Bailing on a well-diversified portfolio at the wrong time. Trying to go over it, or under it, or around it, and missing out on the better times, instead of just going through it.
Here’s some other context I found helpful this week as I continued to think about how to handle these volatile times:
- Over the last 38 years, the annual returns on the S&P 500 have been positive 29 of the 38 years. 2018 will be the 12th negative year since 1980. However, the average INTRA-YEAR drop from highest price to lowest price has been on average 13.8%. Think about that for a second. We just went through a painful 4th quarter, where we saw a drop greater than that, but what this statistic tells us, is that, historically, this “bear hunt” is not abnormal.
Going one step further, the peak on this current bear hunt just happened to also be the all-time high of the S&P 500 Index, ~2,930. If we look back to the last time we were on a bear hunt, it was 2008, when the S&P 500 peaked at ~1,565. We are still much higher than that level, even after a painful couple weeks.
“We’re Going On a Bear Hunt” ends with the children back safely in their home, unscathed. Is this the end of market volatility? Probably safe to say it isn’t. Is it the end of a bear hunt? Maybe not. Will you come out unscathed in the end? Time will tell. But please know that we are here to talk about your feelings and emotions and to review your financial plans and allocations. Let’s see if you need to do anything different. But remember, sometimes, the only responsible thing to do as part of one’s long-term financial plan, is hunker down and just go through it.
*Using the S&P 500 as a proxy for “average investor”
Securities offered through LPL Financial, Member FINRA and SIPC. Investment advice offered through U.S. Financial Advisors, a registered investment advisor. U.S. Financial Advisors and Haas Financial Group are separate entities from LPL Financial.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.