Updated: Nov 8
Readers of the Stoic's Arbitrage appreciate we take an investing long view. We use our Investing Barbell Strategy as a proven approach to managing our finances. But, did you know that only about half of U.S. households own any stock either directly or indirectly via mutual funds or pension funds? [i] Wow. One thing that both personal finance experts and economists agree upon is that better financial outcomes occur when people invest in the equity markets. [ii] A challenging reality is, the path to better financial outcomes in the equity markets is marked with ups and downs.
In 2022, equity markets are certainly more down than up.
The S&P 500 from 2018 to October 2022. This demonstrates a greater than 24% index drop in 2022.
After a nice run in the decade prior, 2022 has shown a drop in the broader market for equities like those found in the S&P 500. While I am not exactly sure why about half of Americans do not invest, my hunch is that investment environments like in 2022 scare the living daylights out of many people! It is both challenging and super important to manage your emotions in a time like this. Your investment staying power is NOW being put to the supreme test! The question then becomes, how do we manage our fear of uncertainty in a volatile and downward-trending market? To this end:
My advice is to ZOOM OUT!
What I mean is, only taking a short-term price performance view of a well-diversified portfolio is a really bad idea. Let's take a "zoomed-in" view of one of the worst financial episodes in modern history, the great financial crisis near the end of 2008. This chart shows an almost 40% drop in 3 months during the darkest hours of the crisis!
Zoom In: The S&P 500 from September 1 to December 1, 2008. This demonstrates an almost 40% drop during the "dark days" of the Financial Crisis.
Now, let's take the zoomed-out view over a decade. This is a more reasonable view based on most people's LONG-TERM needs such as retirement. Remember, financial security and resilience are built over decades, not months. This view is INCLUSIVE of the dark days of the financial crisis.
Zoom Out: The S&P 500 for the decade beginning September 2008. This demonstrates an over 120% gain including and after the Financial Crisis.
In this "zoomed-out" view, a commonly available, well-balanced portfolio like the S&P 500, would have returned over 120% during this time. Imagine if you had been spooked out of the market in late 2008. You would have missed a decade-long wealth-building opportunity!
In our personal finance journey, we show you how to "Zoom Out" with very practical, easy-to-use tools. Most important, this is all about managing your own psychology. I get it, it is tough watching your stock portfolio go down. The answer is - then don't watch your portfolio day to day! - ZOOM OUT!
SPRING Investing: My perspective is, when markets go down, it improves your opportunity to buy balanced equity portfolios at a lower price. The notion is to average down your portfolio basis using a time-tested technique known as "dollar cost averaging."
I liken this to a spring. When you compress a strong spring, you are trapping energy in its coils. Once released, it will give incredible momentum to anything on top of the spring. The U.S. and global economy IS A STRONG SPRING. Thus, load up your compressing investment spring with a well-balanced equity portfolio. Once the market bottoms and the spring is released, then watch your investments fly!
For more information, please see:
[i] Guiso, Sodini, Household Finance: An Emerging Field, Handbook of the Economics of Finance, Volume 2, Part B, Pages 1397-1532, 2013
[ii] Choi, Popular Personal Financial Advice Versus the Professors, NBER Working Paper No. w30395, 2022
We provide several S&P 500 time series price and volume charts from the commonly available Yahoo Finance: https://finance.yahoo.com/quote/%5EGSPC/