The Anzac Day holiday gave us a good chance to pause and express our thanks for all those who have sacrificed themselves to protect our country… both those who have served and those serving now … and their families who have shared them with us. We especially hope that they find the support that they need when times are tough.
In thinking about investing in the current market, the latest white paper from fund manager Roger Montgomery gave us some valuable thoughts to share:
“For several years now, the stock market has been rallying as investors migrated away from the (low) returns offered on cash deposits – returns which (were caused) by governments’ ultra-low interest rate policies and central bank buying of bonds. Low rates forced investors into other (riskier) asset classes… (and) produced record prices across many asset classes (not just shares)… and then along came the collective insanity known as Bitcoin (the ultimate speculative idea).
Over the very long run asset markets like the stock market might be expected to deliver real returns much lower than those that have been achieved recently. For that long run average to remain undisturbed, the recent strong gains will have to (revert back to the long run average). And given most market’s tendencies to overreact, it is quite likely the markets for many assets could decline to levels well below those representing the long-run average growth.
(But no one knows when the market will turn …) as Warren Buffett has observed, the light can at any time go from green to red without pausing at yellow.
(However, an important) thing to point out, is that the (sensational) headlines about the Dow Jones falling the largest number of points in one day ever and about $61 billion being wiped from market values should be ignored.
On February 5, 2018 the Dow Jones fell a total of 1,176 points, from 25,521 the day before to 24,345. This was indeed the single largest daily point fall ever. But let’s put the move, and the media headlines, in perspective and dismiss any notion that something significant actually happened. First, it is important to realize that as the market climbs over the decades, the falls – in absolute points terms – will likewise increase. In other words, percentages are more important than absolute points and the Dow Jones’s move represented only a 4.6 per cent fall… (over 2017), the Dow Jones rallied as much as 32.9 per cent, and in January alone it had rallied as much as 7.6 per cent. A 4.6 per cent fall, in this context, is relatively minor.
By way of comparison, back in October 1987, the Dow Jones fell 505 points in one day, less than half the move registered in early February this year, but that move represented a 22.5 per cent decline… Since 1980, there have been 37 days – an average of one per year – where the market fell by more than four per cent. All of this simply demonstrates that such moves should be considered regular and a normal part of long-term investing in the stock market. While the market’s moves may yet prove to be significant, there is very little of significance in the recent one-day fall for the long-term investor to consider.”
This highlights to us the importance of having a plan – knowing how much risk an investor wants to take – which means knowing what falls are to be expected – and being able to ride out these inevitable falls. And riding them out requires sufficient cash available for what each one needs and wants.
Wishing you well for the month of May,
Tom, Maria, Veronica and Kerrie
at Financial Springs