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Market Update: A Rocky Start to 2016
Global markets have gotten off to a very rocky start in 2016. The U.S. stock market, as measured by the S&P 500 Index, has lost more than 9% of its value in the first six weeks of the year. U.S. small-cap stocks, as measured by the Russell 2000 Index, are down over 14% since January 1. Oil is down 21%.
Before we go into the reasons behind the recent market weakness, let’s examine some statistics about both the past performance and the volatility of the U.S. stock market that are critical for today’s investors to understand if they are to stay on their financial course.
In the last 60 years, the U.S. stock market is up nearly 300-fold. (This is simply a remarkable return to be achieved in a span of time that is shorter than the average American’s life expectancy.) However, as investors were earning their 300-fold return over the last 60 years, they spent much of that time nervous and underwhelmed with the markets. In fact, historically the market has spent little time at its highs. Instead, it has spent much more time trading substantially off its highs. Consider the following market insights compiled by investor Michael Batnick and published in Morgan Housel’s column at the Motley Fool, a well-regarded (in my eyes) investment newsletter. In rounded numbers, the market has been:
Thus, on their way to 300-fold returns, U.S. stock market investors spent nearly 43% of that time with the market down 10% or more from its prior highs.
Just last May the U.S. stock market was at its all-time highs. Today the S&P 500 is down 13% from those levels. Why has sentiment in the markets turned so rapidly? There are three major reasons:
After slogging through 2015, a year in which most asset classes posted declines, investors are rightfully disappointed and concerned with how stocks are behaving so far in the new year.
At such times of volatility, it is critical for investors to keep their eyes on their long-term objectives and not make emotional decisions. In investing—an inherently unpredictable endeavor—it is especially important to put the probabilities on your side. With stocks, this means staying invested through tough times. Investors should keep in mind a persistent trend in stocks: the longer you are invested in stocks, the higher the chance you have of earning a positive return.
Here are some statistics investors should consider that may help them to endure today’s volatility without making any financial decisions that could meaningfully degrade the return potential of their portfolios in the years to come. According to Ibbotson Associates, a market research firm, investors have historically had:
Investors who seek to realize the attractive long-term returns on offer from stocks should strive to take today’s volatility in stride and try to get themselves comfortable with being a little bit uncomfortable.
Please do not hesitate to let me know if there is anything you would like to discuss about your portfolio or the markets.
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