Someone once said: "The stock market always acts to fool the greatest number of people." That has certainly been the case in the past few days. Market pundits have proved wrong at every turn. And there have been many of them -- both pundits and turns! If you ever needed evidence that it is impossible to call market direction even for a day, much less to call the bull and bear turning points, you have it now.
Yes, the stock market can be volatile. But in recent days it has been absolutely ornery -- refusing to accede to the demands of bulls or bears. And those are the responses of the professionals. What are you, the ordinary investor, supposed to do in the midst of all this volatility?
The simple instruction of "don't panic" is certainly not enough to go on. In fact, following that dictum blindly almost guarantees that you will panic in the end. And when enough people panic, that's when bottoms (or tops) are made. We are not there yet, because the panics are evenly balanced!
A Few Lessons of History
What you really need is a reasonable plan -- and a reason to stick to your plan. And at market extremes, those reasons are hard to remember. So let's take a look at a few lessons of past history.
Lesson 1. Time is on your side. Here's a fact from Ibbotson, the market historians, now a division of Morningstar. There has never been a 20-year period, going back to 1926, when you would have lost money in a diversified portfolio of large company American stocks, with dividends reinvested. Even adjusted for inflation.
In fact, the average annual return of that portfolio since 1926 (with dividends comprising about 40 percent of the total return) has been 10 percent annually through year-end 2014.
Of course, averages can be deceptive, and those average returns hide some years of great extremes. But this statistic should be a great comfort to those who have at least a 20-year time horizon.
That includes those under 55 who are working and contributing to a retirement plan. Lower prices give your fixed monthly contribution a chance to buy more shares. That will boost your assets over the long run. And since 84 percent of professional fund managers failed to beat their benchmarks last year, you know the odds are long if you try to time the market.
On the other hand, if you're a retiree, forced to withdraw from your IRA every year, you could be in trouble if you're forced to sell stocks when the market is down. As of Tuesday's market close, we were still "only" slightly more than 10 percent below the market's all-time highs. The last bear market in 2008-2009 sent the market down 48 percent, and the horrible bear market of 1973-47 saw a similar percentage decline, followed by a decade in which the market stayed at relatively low levels.
This lesson reminds us why you need to be aware of your own time horizon, as well as the market's daily actions.
Lesson 2. Perspective is important. Yes, the numbers are startling -- but they loom larger when you hear big numbers like "down 1,000 points". Keep these swings in perspective. Monday's nearly 4 percent decline in the S&P 500 index was actually one of 55 days on which the has index lost 3.5 percent or more since 1983.
Daniel Wiener, editor of the "Independent Adviser for Vanguard Investors," and an investment advisor at Adviser Investments in Newton, Mass. with over $3.4 billion under management, compiled the actions of the S&P 500 in the one-year periods following one-day declines of at least 3.5 percent.
In nine of those one-year periods, the market did decline -- an average of 7.7 percent. But perhaps you will be as astounded as I was to learn that in 45 of those one-year periods, the market was actually higher a year later. In fact, the average gain in those years was 27.6 percent!
This lesson reminds us not to let today's pessimism overwhelm our thinking and our emotions.
Surely, someone out there is now thinking "yes, but this time it's different." Well, history says it is never "different this time." Yes, there are different reasons for pessimism. Now it's China. Eight years ago it was the global banking system. 15 years ago it was the tech wreck that made it "different."
The one thing that never changes is human nature. And that's The Savage Truth.