“People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences. Calamitous drops do not scare them out of the game.” – Peter Lynch, American investor, mutual fund manager, and philanthropist
In investing, when people say, “It’s different this time,” they are expressing a belief that the market is somehow not going to react as expected. They might think they can now time the market and will be pulling their money out, because “it’s different this time.”
However, here at The Nalls Sherbakoff Group, LLC, we believe you must look at the markets with a long-term perspective and rely on the evidence instead of your emotions. History tells us it is not different this time – so trying to correctly get in or out of the market is often tricky, tense, and costly. Peter Lynch, Fidelity Investments’ Magellan fund manager from 1977 – 1990 and considered to be one of the most successful stock market investors of all time said, “Far more money has been lost by investors trying to anticipate corrections, than has been lost in corrections themselves.”
Instead of trying to predict the future through some magical crystal ball, we can look to the past to get a sense of how markets operate. Bear markets, defined as a drop of 20% or more from the previous peak market high to the bottom of the trough, occurs in markets from time-to-time. Between May 1946 and Feb 2020, there have been 11 bear markets, ranging in length from one month to three years, and in severity from a 57% drop in the S&P 500 to a decline of 22%. You may recall some of these bear markets over the last 50 years.
When you look over these six bear markets, you can see large but temporary drops in the market. So, when you look at these percentage drops how does it make you feel? What emotions are you experiencing? Are you thinking that markets are terrible, it’s a rigged system, and all markets should be avoided?
You might be feeling higher degrees of loss aversion. Humans feel a loss much more deeply than they feel the gratification that comes with a gain. You may be feeling that you want to stop the trend and sell out. Perhaps you worry that your investments will go to zero.
Conversely, perhaps you’re thinking that these deep bear market drops might be good opportunities to put excess cash to work in the market, and that you should continue to invest each month through your workplace retirement plan.
It is important to understand no one can consistently predict the markets, and you have a plan you can stick with over the long-term.
With shocking headlines, 24-hour business channels, and so many pundits and prognosticators bombarding us about the dangers of inflation, how much higher interest rates may go, the difficulties for small businesses to hire competent and dedicated staff, and reporting on global disruptions in the supply chain logistics, you may be thinking that this time “it is different.” But is there really something fundamentally different in the way markets are working now? We don’t think there is.
Markets are forward-looking. The unexpected news and flashy headlines may cause short-term volatility in market prices, but over the long-term it’s the company’s earnings or losses that affect stock prices, even though both optimistic and negative expectations are quickly incorporated into market prices. Interestingly, when a stock is sold or bought, the price movement reflects the buyers and seller’s expectations, which are exactly opposite. One person buys a stock with the expectation of it going up in price while, at the very same time, others are selling that same stock because they think it will go down.