By Ted Stephenson
Recent sharp market movements should not influence unduly on investments
As Benjamin Graham notes in his well-known book, The Intelligent Investor: “Every investor who owns common stocks must expect to see them fluctuate in value over the years.”
There is always a lot of media attention when markets move quickly with fairly large percentage fluctuations and on Monday 5 February 2018, the S&P 500 closed at 2,648.84 down 113 points from Friday’s close of 2,762.13, which was just more than 4% down on the day and almost 8% from its recent record high.
To put Monday’s market movement into perspective: on October the 9th 2007, the S&P 500 closed at 1,565. By March 9, 2009, the S&P 500 was at 677, a price loss of 57%.
Similarly, the maximum drawdown on the MSCI Emerging Markets index was 65% from 29 October 2007 to 27 October 2008.
Since the bottom of that trough in 2009, the S&P 500 has gained 391% on price, and the total return including dividends would be a bit more. Stock markets fluctuate, run in trends and cycles, and long term, on average, stocks provide growth of capital.
In a commentary in The Intelligent Investor, Jason Zweig further states that “If you overestimate how well you really understand an investment, or overstate your ability to ride out a temporary plunge in prices, it doesn’t matter what you own or how the market behaves.
“Ultimately, financial risk resides not in what kinds of investments that you have, but in what kind of investor you are.”
The longer your investment time horizon, the less attention should be paid to short term movements in the markets and to hold on.
Legendary investor John Bogle’s sage advice is as follows. “Impulse is your enemy. Eliminate emotion from your investment program. Have rational expectations about future returns and avoid changing those expectations as the seasons change. Cold, dark winters will give way to bright, bountiful springs.”
Ted Stephenson is Executive Director, CFA Society Emirates