On April 11, 1970, the Apollo 13 rocket launched into space on a mission to the moon. Two days later, the landing was aborted when an oxygen tank exploded, crippling the spaceship’s functionality and nearly killing the crew.
Upon coming across this story recently, I began to wonder if investing in the stock market had parallels to riding in a rocket ship? Is it truly possible to accelerate with rocket boosters to the highest level of the Dow? Do clients feel like they’re going to die? Does investing require the courage of Neil Armstrong?
Over the past nine years, we’ve been cruising higher and higher ... and many of us have enjoyed the ride. In fact, a client described his portfolio’s upward climb in this way:
“This morning I handled email and read the news. (Another 38 murdered in a suicide bombing, homeless need more bathrooms, North Korea is a problem, and Trump is making some people angry--nothing new.) I then looked at my investments, which is becoming a habit that I had hoped to avoid. So - the question is, will I be as interested when the market is falling? In any case, the account is a rocket ship and you got us a great window seat.”
I was thrilled to get this email and to hear how pleased he was about his current investment status. And yet, I lost sleep that subsequent night imagining how he would feel when this “rocket ship” hit some serious turbulence.
Where the Journey Will Lead
We are now over nine years into a bull market. Stock increases are the second highest in any consecutive bull market with a 302% return since 2009. The highest rate of return occurred during a bull cycle that started in 1990 and delivered 417% return.
Historical data tells us to expect two things:
1 - The stock market will have many down days.
2 - The stock market will eventually go back up, and up, and up.
Knowing this, we must patience-proof our thinking with clear facts. In the long term, the stock market will reflect the profits and growth of companies where millions of people around the world go to work every day.
In the short term, the stock market can be as erratic as a 2-year-old throwing a fit—best not to manage or overreact to a toddler if you can avoid it—and same goes for the market.
How Current World Issues Affect the Market
Each generation faces challenges that appear unique and daunting. Today we’re dealing with issues that are significant—trade wars, the rise of China, a divided Washington, D.C. In reality, these are likely no more formidable than past events like the Great Depression, two world wars, the Cold War, assassinations of a President and resignation of another, and 9/11. Yet the market, until recent weeks, has continued its unbelievable ascent.
Why is this? Perhaps it’s a result of our human race being quite resilient, innovative, and devoted to making the world a better place.
As financial writer Nick Murray once said about the market, “All the downs are temporary, all the ups are permanent.”
What’s important is that you have the courage to stick to your investment plan. If you do, you’ll be able to achieve your financial goals over time.
Winston Churchill believed strongly in the power of this valued trait, saying, “Courage is rightly esteemed the first of human qualities because it is the quality which guarantees all others.”
Getting Ready for What’s Next
With this in mind, how can you prepare for an inevitable market “crash”?
· Be less interested in your statements. Checking them once a quarter is more than enough for long-term investors.
· Resort to stock market history. Refresh your memory of other near-death moments that turned out okay. Two interesting reads in this category are Stress Test (Geithner, 2015) and Boom and Bust: Financial Cycles and Human Prosperity (Pollock, 2010).
· Diversify your holdings. This includes holding thousands of companies and at least three or four investment categories with low correlation, meaning they tend not to move together at the same time.
· Role play with your advisor to determine how you will handle the next big market drop, Include a thorough review of your defensive and cash equivalent investments.
· Be ready to invest a bit more. Once you have high interest debts like credit cards paid off and an emergency fund in order, add money to your investments consistently over time, perhaps even taking advantage of market dips.
Despite not being able to time market drops, one is inevitably going to come. In the meantime, there will be tremendous turbulence along the way. Though you won’t crash or burn up during re-entry, which astronauts faced as risks during the Apollo 13 mission, there will be times when it feels like you will. Just as there will be times when you feel like you can only accelerate and go higher.
Have courage and patience during the most difficult investing moments, and trust that in the long term capital markets will reward investors.
Take a peek at the 2018 year-to-date investment performance through September 30, according to JP Morgan’s quarterly “Guide to the Markets.”
2018 Year To Date Return Through 9/30/2018
US Small Cap Stocks, 11.5%
US Large Cap Stocks, 10.6%
Publicly traded REITS, 1.8%
International Developed Stocks, -1.0%
Fixed Income – Bonds, -1.6%
Emerging Markets Stocks , -7.4%
Past performance is not indicative of future returns.
J.P. Morgan Chase - Guide to the Markets – U.S. Data are as of September 30, 2018.