No, that picture is not to scare you, it’s just used to described what people call a down market. A “bear market”. Despite the record setting years of the last decade, stocks are down this year. This is no surprise as I wrote about it at the beginning of the year. Interest rates are rising and the consequence of that is greater risk in the market. 2018 will be remembered for the year that stocks fell rather than the end of an extraordinary run up of stocks over a decade. But is it time to panic now?
Unlike 2008, there aren’t grave danger signs that are pointing to a collapse in the marketplace. 2018 might be the year where things actually return back to “normal”. After 10 years of cheap money since the 2008 crash and where interest rates were kept at essentially 0%, we’re finally getting back to “normal”. For some of us, we don’t even know what “normal” means anymore.
Many readers here probably don’t even know what a negative stock market is. Since the beginning of December the markets went on a rout and lost nearly 20%. That’s what analysts call a bear market. Things like this happen on the stock market. You just have to remember that for most people, stocks are an emotional investment. When things turn sour, everyone rushes for the exit. The prudent investors are the ones that see “Boxing Day Sales” signs.
With the recent negative showing in the stock market, many people have already forgotten what has happened in the stock market since 2008. The yearly gains for the S&P 500 since 2008 have been the following: +9.1%, +8.9%, +4.4%, +13.5%, +41.5%, +24%, +21%, +8.6%, +13.8%. I know we’re not all math majors but that was over 300% cumulative compound gains. It’s no wonder that anyone who has invested over the last decade has probably made a killing. There were no losers!
Now it’s different and people are scared. Out of nowhere, in a single month, the markets lost 20%. People are scrambling for the exits and everyone thinks 2008 is happening again.
I’ve mentioned time and time again. In the long run, the stock market reflects the overall health of the world’s economy. If we look at previous years where returns were north of 20%, it’s pretty simple to see that the market was getting ahead of itself. Remember that long term returns on the stock market only average anywhere from 6-8% so the 20% gains were just not sustainable. Those that are thinking that the market can consistently return north of 20% are just being delusional.
If we look at the currently economic climate, it is very much different than 2008. Unemployment in the US and Canada are still at very low levels. In fact, companies are still hiring and there is a huge demand for workers in specific sectors like technology and knowledge industries. This wasn’t the same as 2000 or 2008 where the finances of technology and bank companies were in bad shape. Corporations are still making boatloads of money and will continue into 2019.
The Guessing Game
With the stock markets being down, people are now scared to invest. Since money is such an emotional asset, people are now trying to guess when the market will hit the bottom before investing again. 2 days ago the market had reached a 20% fall. Some thought it would go further, but 2 days later the market was back up 6%. When are we at the bottom? No one knows. Guessing is futile. Don’t bother trying.
There is no pattern or predictability in the stock market. It’s impossible to judge emotions. If we could, we’d all have long lasting relationships, which some of us know is not the case. Sitting on the sidelines now could mean missing out on another 10-15% gains before it’s already “too late” to invest. Or perhaps investing now now would result in another 15% drop. Which way it goes no one can predict.
The best approach when investing for the long term is to stay the course. The best action to take on a large corrections is to re-balance your portfolio. If you’re still confused check out on of my previous posts.
If you’re still sitting on the sidelines and you’ve been waiting for the bottom, then you’re probably not really cut out to be investing on your own. There is already an inherent fear of jumping in. It’s like learning to swim with the fear of water. You’ll never want to get your feet wet. Perhaps investing on your own is not something you’ll do well in. Seek professional help.
For those that think that this isn’t the bottom? Well I personally don’t really care. If you stay invested for the long run and don’t care about these corrections, in a 10 year horizon, these drops are going to be minor bumps along the way. Just leave everything on autopilot and enjoy your holidays. I know I certainly will.