Do you need a hug?

A real financial advisor’s job is to create peace of mind around money.  Part of this involves helping clients understand, in a world of constant information, what matters, what is helpful, what is important, what is controllable and what they need to focus on.  Unfortunately, everything that the media puts out there tends to not matter or be helpful, important, within our control or worthy of much focus.

The market fell a few percent this week, as it routinely does, and the financial media literally went hysterical with their end of the world calls. 

I have no idea how much further the market will fall before recovering.  But I do know that it will recover.  And I do know that the world will not end.

My friend Carl Richards wrote a piece for the NY Times earlier in the year (the last time the market had a little breather), and I quote:

If you’re worried about the stock market, find someone to give you a hug.

Let me explain. Humans are wired to want more of what gives us security and pleasure and to run away from things that cause us pain. This behavior has likely kept us alive as a species, but it creates havoc when we invest.

When the markets go down, and the financial pornography networks start yelling that you should save yourself before you end up living under a bridge, it feels like a wild animal is chasing you. The only thing to do is run!

Feeling scared is normal at that moment, and the last thing you need is a lecture from me on the history of long-term stock market returns. You don’t need facts and figures; you need a hug! You need someone to listen to you. You need empathy, kind murmurings, physical affection. An embrace.

He is totally right about this.  When you are worried or scared about something, the last thing you want is for someone to throw a whole load of facts and figures in your face.  What you want is for someone to say ‘I know, this feels rough.  I really know.’  And I promise you I do know.  My family have a good part of our net worth invested in the markets, and my business is tied to the performance of the markets.  It feels rough indeed.  We signed up for it when we invested in the only asset class that historically has given us a good chance of achieving our goals, but it still doesn’t make it feel any better.

So I am here for a hug.  Anyone that needs one.

And because it’s my job, and I love facts and figures, I am going to give you a few (and I know some people like them).  But only the important ones – the things you need to know because they matter.

Below is a chart from JPMorgan’s indispensable Guide to the Markets.

Returns and volatility.PNG

It shows the intra-year declines in the S&P 500 going back to 1980 versus the calendar year returns.  That is, it shows the largest peak to trough drop that happened at some point during the year (the red dot) and the actual return for that full year (the grey bar).  So looking at 1980, the first year on the chart – the S&P 500 fell 17% at some point during the year (see the red dot) but ended the year up 26% (see the grey bar).

What strikes you about this is that there aren’t many bars that fall below the 0%.  Only in 8 of the 38 years was the stock market return for the year negative.  But in more than half of the years the market, at some point during the year, fell 10% or more, and the average fall was just under 14%. 

1987 is a fascinating stand-out year.  That year included Black Monday, a day on which the Dow Jones fell 22.6% (in ONE day).  However, despite that, 1987 was a positive year for the stock market.

To put a bit more context on the chart above, the S&P 500 index at the beginning of 1980 (the start of the chart) stood at just under 108. Today it is just under 2800.

What I am saying is that the roughly 5% that the market has fallen from the peak last week barely registers on the chart above.  It is totally normal.  It’s exactly what stock markets do.  And by ignoring this short-term noise (a.k.a. volatility) and focusing on the long-term, it’s exactly how we, long-term equity holders, get rich. We get rich because of this volatility,

As an aside, according to John Butters at Factset, the blended earnings growth rate for the S&P 500 in the third quarter is 19.1%.  If this turns out to be the actual growth rate for the quarter, it will mark the third highest earnings growth since the first quarter of 2011.  That puts the forward 12-month P/E ratio of the S&P 500 on the 12th October at 15.7.  The US GDP growth was 4.2% in the second quarter of 2018 and the unemployment rate is less than 4% (the lowest since the Vietnam War).  I don’t know about you, but it just doesn’t FEEL like the sort of environment in which the world is going to end.

I will leave you with a quote from my client newsletter of February this year. 

Here is a thought from Winston Churchill (that comes from my friend Nick Murray). Churchill famously said that democracy was the worst form of government ever devised by man – except for all the others.

You could say the same of our investment policy, which is based on the conviction that the only way to be sure of capturing the long-term permanent return of equities is to be willing to absorb all of the temporary declines. This is, some might say, the worst investment policy ever devised by man – except for all the others.




Georgina Loxton