The fourth quarter of 2017 came and went without so much as a nod to its importance. In fact, most readers probably don’t even recognize its significance. Allow us to take you back a mere 10 years to the fall of 2007 – no pun intended. By October of that year, US investment banks and the Federal Reserve were struggling to contain the fallout from the mortgage meltdown. On October 9th, 2007, the Dow Jones Industrial Average (DJIA) closed at a record high of 14,163. Then, the US markets and economy slipped into the scariest and most precipitous drop since the Great Depression in 1929. Banks failed. Bear Stearns and Lehman Brothers went belly up. Merrill Lynch had to be rescued by Bank of America, which had to be rescued itself. Central banks around the world pumped tens of billions of dollars out to stave off a deepening global financial crisis. The US economy fell into recession. It felt like the end of the world.
Between the end of 2007 and March of 2009, the DJIA fell more than 54% to its low of 6,443. These were dark times, indeed. It’s easy to understand how many investors panicked and wondered if they should head to the sidelines. But, we were advising anyone who would listen to do just the opposite. Not only did we encourage clients to maintain their diversified portfolios, but we implored them to add to their holdings with any spare change they could find. “Look under the sofa!”, we cried. “Check under the car seats!” In many instances, we received blank stares back. “But it’s going to zero!”, we heard. “The guy on the nightly news says so!”. And so on.
In 2007- 2008, nervous investors had to make one of three choices. They were:
1. Maintain your diversified portfolio and ride it out.
2. Maintain your diversified portfolio and add more to it. (Which we advised)
3. Bail out and go to cash until the storm passes. (Which we implored you to avoid at all costs.)
Fast forward to the present. Today, less than a decade later, the DJIA sits at 24,700, roughly 4 times its low point in 2009. (Pick another market index if you like – the S&P 500, the NASDAQ, etc. they are all at record highs. Again.) Those investors who wisely chose Door Number 1 or 2 not only recovered from their temporary declines, but have profited handsomely from it and built more wealth for their families. Sadly, many unguided investors (“I’ll do it myself, I don’t need any help, thank you.”) chose Door Number 3 and some remain in cash to this day, missing an all-time, historic, and genuinely epic rally in the value of companies around the globe.
“So”, you ask, “how did we know?” Do we have a crystal ball? Did we consult the heavens? Are we clairvoyant? Nope. None of the above. We take no credit for “predicting” anything. We simply followed our Five Immutable Laws of Investing, which have been proven to be true since the beginning of recorded history time and again. To help you begin the new year in the right frame of mind, we’ll provide them to you again here. Print them off. Stick them on your refrigerator. Carry them in your iPad. Whatever. Just keep them close by, because if history is any guide, you’ll need them again. Here you go:
1. The future short-term direction of things is fundamentally unpredictable, unknowable, and unimportant.
The simple truth is – no one knows anything about tomorrow. If anyone could predict the short-term future, they would have everyone else’s money by now. While Wall Street would love for you to believe they have better insights into the future than you do, it’s simply untrue. Some of the most intelligent people in world found themselves unemployed after 2008. And, If Law #1 is true (which it is), it should be abundantly clear to us all that trying to time the market is a fool’s errand. The recovery didn’t start until March of 2009 – and no one knew it then. Timing doesn’t work – period. Finally, why is knowing the short-term future unimportant? If you’ve planned well, and you plan to be around for a while, what happened yesterday will be a distant memory in a year or two, Or five. Or ten.
2. The investment markets are in the middle of one long permanent advance that is punctuated by temporary declines.
This is a factually accurate statement. The truth is, the markets have been going up your whole life. They just don’t go straight up. You see, the price we pay for the advances is the declines. If the declines went away, so would the advances. Let’s prove this Law with a simple question: Since you’ve been alive, what percentage of the time have markets declined, only to then advance to new record highs? (Think about it…we’ll wait.) The answer historically speaking is 100% of the time. Not half. Not sometimes. But every single time. The problem of course is we don’t know when the advances and recoveries will begin. That’s why investors must stick to their guns when things get messy.
3. Diversification and time leach almost all the risk out of a portfolio of quality investments.
Take a wooden match. It’s fairly easy to break, right? Now, bind ten wooden matched together and try it. Not so easy to break, right? By spreading your investments out over a global portfolio of many different assets, two things happen. First, you don’t make a killing. Second, you don’t get killed. And time is the most important component. See Law #2 again.
4. Loss is permanent; fluctuation is temporary.
Our favorite law. Most investors equate the term “risk” with permanent loss. But losses are only permanent when you sell. Until then, it’s just temporary fluctuations in value. Everything in your life fluctuates. Your relationships, the price of gas for your car, your favorite sports teams record, etc. Why should your investments be any different? By determining your tolerance for risk (defined as temporary fluctuation in value) and setting your portfolio up to match it, you eliminate the potential for unpleasant surprises. So, think of risk as the potential for fluctuation, not as permanent loss.
5. The world is always ending – it just never ends.
Every night, the newscaster gives you a dozen reasons to sell everything, buy guns, and move to a remote mountain cabin to avoid the coming disaster du jour. But, every pending disaster either comes and goes, or doesn’t come at all. And then the world gets back to the business of moving forward. Every single time. So, instead of wondering if you should cash out the next time things take a dive, perhaps you should remind yourself that investments are now on sale and buy some more of them at these new (lower) prices before they go back up again.
In closing, we’d like to wish you and your family a happy and healthy holiday season. We’ll see you in 2018!
– Your First Coast Wealth Advisors Team