Last week was another good one for the stock market. This week was up until today, June 11, 2020, looks like it could be down 5-7% depending upon your index.
Consider: The media loves to talk about the Dow Jones average and not the S&P 500. You know why? Excitement / emotional impact over a bigger number. Example: Dow is down 500 points gets a much bigger reaction than the S&P is down 62 points. OMG 500 points that is awful. Verses, “meh” 62 points, no big deal. The reality is they mean similar things percentage wise. Currently, both represent a 2% change in their respective index. You are being stimulated by the bigger number to get your emotional reaction. If you must pay attention to the DOW because that is often all that is reported, listen for the percentage change and not the raw number
The Dow is an index of 30 companies represented by companies like Microsoft, Apple, Exxon-Mobile, Goldman Sachs, Home Depot, Dow Chemical, etc. There are roughly 3,500 publicly-traded companies in the US and 630,000 globally. Therefore, the Dow represents roughly 1% of the US stock market. The S&P 500 is guess what? Yes, 500 US traded companies and even though only 14% of public companies, a better representation of the overall US stock market. The NASDAQ index is made up of 3,300 companies and is heavily influenced by the technology sector.
Sometimes one index is up or down much more that the others merely because of what is in the index and how that index is calculated. The index may or may not have a strong correlation to your portfolio returns. So maybe an index may not deserve the attention you may be giving it. If you have a large defensive position in bonds or cash, an index may vastly overstate (up and down) your actual return.
How are you dealing with market volatility? Are you checking your phone daily or worse yet multiple times a day to see how the market is doing? Does your stomach tighten? Are you losing sleep? Or do you have a plan you are following? Do you know how much money you will need for the next three years to “keep you in your own world?” How long are you going to live? Do you plan to spend all your money? Or are planning / hoping (barring a health care disaster) to leave a legacy to family or charity?
Perhaps I can provide some perspective. Since 1926 *, the US stock market (S&P 500) has returned investors an average annual return of 10%. Remember “average” – your results will be different depending upon decisions you make. Some years are great, some awful. Yearly returns were as high as 54% up and as bad as 43% down. Since 1926, returns have been positive 69 times and negative 25 times.
Often, I hear, “I am getting ready to retire (or I am already retired) and I can’t afford to lose money.” Ok, I get it. Concern over the immediate future is scary. However, I would propose you break your money up into buckets of when you plan to spend it.
Bucket #1) Money you will need in three to five years…. absolutely, yes, no risk. You never want to be forced to sell at a bad time for you. But make that decision when the markets are rolling and prices up. Current domestic, global, market conditions should not impact your overall financial / investment plan.
Bucket #2) What about the money for your life in ten, twenty or thirty years from now? Do you know people in their 90s? What is your chance of living that long? Or are the kids and grandkids slated to get this money? My question is this: Are you planning for the next six month to one year? Or planning for twenty to forty years?
Yes, the stock market will be down probably one out of every four or five years or even three years in a row. No one can predict when or how much. But for the money you are not spending over the next three to five years, would you prefer to earn 10% or maybe 8%, or even 6% or the equivalent of bank CDs or treasury bills?
Design your portfolio to match your cash-flow needs; your long-term financial priorities; and finally, to your risk tolerance. Then fight like hell to resist the temptation to get emotional over day-to-day national and international events that rile the markets and give the media something to shout about.
Call me if you have concerns or questions about your financial plan / investments. Stay safe. Make good decisions about health and wealth.
Investment Advisor Representative and Registered Representative of, and Securities and Investment advisory services offered through Voya Financial Advisors, Inc. (member SIPC)
Past performance is no guarantee of future results.
The views and opinions expressed are those of the author, and the information should not be construed as individual investment advice, or as the opinion(s) of Voya Financial Advisors. CN1214014_0621