”It’s always something. And then it’s nothing.”
Stocks saw their first true panic selling in Third Quarter 2015 since the U.S. default crisis of 2011. In a particularly volatile week in mid-August, the Dow fell nearly 2,000 points in just five trading sessions. The VIX index, which measures the level of fear in the stock market, spiked into the mid-50 range, a level last seen during the 2008-09 financial crisis. For perspective, a reading of 30 in the VIX index is considered “extreme fear.”
Investors responded predictably to these events: They ran screaming for the exits like their hair was on fire. Net equity mutual fund redemptions for the week of August 25 totaled $29 billion – a new record. Net equity fund outflows the day the selling peaked were at a level not seen since October 2008.
Lost in all this hysteria was the reality that a downturn of this magnitude was hardly out of the ordinary. The average peak-to-trough (high point to low point) decline for the market on a yearly basis going back to 1980 is 14.1%. By that measure this decline was little more than business as usual. Yet another $29 billion now sits parked on the sidelines in cash, having missed the upturn that began in September and has continued to the date of this writing.
Where the stock market heads from here is, of course, anyone’s guess. But even if the coming months see another, even deeper, downturn, we know that whatever events are the cause of it – a slowing Chinese economy, rising interest rates, etc. – will eventually run their course. As financial writer Nick Murray is fond of saying, “it’s always something. And then it’s nothing.” Meaning that events resolve themselves over time and then the stock market commences its inexorable upward climb.
Sometimes those events come and go quickly, like the 2011 bear market following the U.S. default crisis. And sometimes those events are long and worrisome, like the 2008-09 financial crisis. Whatever their nature, though, the goal for long-term investors is the same: to be able to endure those events and come out on the other side with your portfolio intact so that you are there when the inevitable recovery commences, as it always does.
That’s why spreading risk among asset classes and investment styles is so important. Many investors who were concentrated in financial stocks were wiped out when The Great Recession hit and had no assets left to invest when the ensuing recovery began in 2009. In contrast, well-diversified investors recovered relatively quickly – as long as they stayed put.
The long recovery that commenced in 2009 was not unusual; in fact, it was typical of market recoveries after major downturns. Consider the chart on the previous page showing the one-, three-, and five-year returns for a hypothetical 60% stock / 40% bond portfolio following some of the major crises of the past thirty years.
Staying put is, of course, the hard part, as evidenced by the billions of dollars that fled the market a few weeks ago. It’s especially hard when the media gloom machine is in full force as it is right now. CNN breathlessly reported on August 26 that “$2.1 trillion was erased from the U.S. stock market in six days.” Who wouldn’t find that alarming? And yet can you recall any article since then pointing out that the market has since added back about $1 trillion? Or pointing out the fact that U.S. household net worth has increased nearly $17 trillion from the pre-recession levels of 2007? Neither can we.
That’s why it’s imperative to turn off the TV and walk away from the computer when panic hits the markets and a long-term perspective becomes difficult to maintain. Just remember this mantra: It’s always something. And then it’s nothing.