No doubt most readers of my column have been made aware of the turmoil that has fallen on the financial markets in the past month. Many clients and friends of mine who were so confident in the markets spectacular run are now asking questions. What happened? Why did it happen? Will this continue and for how long? And the most important question I am asked is, what should I be doing with my money going forward?
Let me answer the first two questions for you as simply as I can. The federal government raised interest rates to hopefully slow down the economy and prevent it from overheating so to speak and causing inflation. This has caused the stock markets to correct in the past and should continue to do so in the future. That and the rising of the stock markets in double digits in recent years had to come to an end sooner or later. So, in a sense, the smart money saw it coming. But they, like the rest of us simply did not know exactly when or how much. What, in my opinion, magnified the downturn was the advent of consumer online trading. In other words, it is possible to go to any number of brokerage houses now, open an account and trade for yourself over the internet. This trend has been at its highest level ever. So literally millions of active traders had knee jerk reactions and sold their holdings instantly at a furious pace, driving the markets to historic one day losses. In addition, it is a mathematical certainty that the higher the markets go, the larger the swings that can potentially take place.
How long will this last? Once again in my opinion that is based on past historical trends, expect it to last for months to come. So to summarize, the markets were overheated for some time and a healthy correction, (or profit taking) was well overdue. So, my friends and readers ask, why didn’t I predict it to the day and get mine and my clients money out until things settle down and then put it all back in? Isn’t this what stockbrokers are supposed to do? Buy low and sell high consistently? I will answer that question with a question. Is the investor in it for time for timing? By that I mean are they in it for the long haul or are they trying to make a quick buck? If they are in it for timing or a quick buck, the historical odds are stacked heavily against them. I have shared this in a past article and it bears repeating: according to a FINRA* study of market timers and active traders, fully 97% of them consistently lose money. 2% break even and only 1% make money.
Still not convinced that market timing doesn’t pay and staying in for the long haul is the best approach? Let me share with you a study conducted by the investment firm Allianz Global Investors** in which they looked at the performance of the Standard and Poor’s 500 Index from 1963 to 2017, comparing four different investment approaches and the historical returns of each. In each case they took an investment of $100 at the beginning of each year and added an additional $100 at the start of each subsequent year for 54 years:
- Standard Yearly Investment. Total return $75,943 or 7.53% per year.
- Investing on the best day of the year or the lowest index level for that year. Total return $83,718 or 7.77% per year.
- Investing on the worst day of the year or the highest index level for that year. Total return $67,223 or 7.22% per year.
- Missing the three best days of the year. This case assumes one invests $100 at the start of the year but misses the three best trading days of the year. Total return $3,535 or -1.69% per year.
Now keep in mind that these are historical returns and not a guarantee of future results and that the stock market is NOT for everyone. But it does show in pretty strong terms why an equity investor shouldn’t be overly concerned about the recent market downturns if they are in the stock market for the right reasons.
If you have any questions regarding this article or I can be of any assistance with your investment needs, feel free to call me at 480-296-9556.
*Financial Industry Regulatory Authority
**Allianz Global Investors, Datastream US Total Market Total Return Index 1963-2017 (Internal Rate of Return(IRR) on $100 Investment)
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Office: 480-307-9909, Cell 480-296-9556
Purity Wealth Advisors is not a broker/dealer and is independent of Raymond James Financial Services Inc. Securities offered through Raymond James Financial Services Inc Member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. All investing involves risk and you may incur a profit or a loss. There is no assurance that any investment strategy will be successful. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Rudy Eidenbock and not necessarily those of Raymond James.