Thirty years ago this month, I began my career in the financial services industry. Like most 25 year olds, I was sure I knew everything already. And, as usual with twenty-somethings, I had a lot to learn.
Fortunately, I had some great teachers and role models. I had the privilege to spend a few days with the late Sir John Templeton, one of the greatest investors of the 20th century, and learn from his experience. I studied at the feet of Bill Sharpe and Harry Markowitz, both Nobel Prize winners for their work in portfolio construction. These gentlemen may not be familiar to most people, but they are widely respected in finance for their accomplishments, and they were instrumental in shaping our approach to managing wealth and our investment philosophy.
Summer of ‘85
As I reflect on the past three decades serving clients, it occurs to me that 30 years is about the same length of time most people will spend in a typical retirement. So turn back the clock three decades. Here’s what the world looked like in the summer of 1985:
The hit summer movie was “Back to the Future”. The top song on the Billboard chart was “Everybody Wants to Rule the World”, by Tears for Fears. “Moonlighting”, with Bruce Willis and Cybil Shepherd, was the hottest new TV series. The Titanic was discovered. Mikhail Gorbachev took over as leader of the Soviet Union. Michael Jordan was named NBA Rookie of the Year. Any of this ringing a bell?
Investing, Then & Now
In addition to this pop culture flashback, I’ve also prepared a brief look at what the investment world looked like 30 years ago. Let’s imagine you were ready to retire in the summer of 1985, and you were hesitant to buy stocks with your retirement savings. After all, they had been on a tear since 1982, racking up 20%+ gains in 1982, 1983, and 1985.
In the summer of ‘85, the Dow Jones Industrial Average was somewhere around 1,330. (I recall we had an office pool speculating on when it might reach 2,000, an unimaginable goal.) The S&P 500 was lingering around 186.
Thirty years later, the Dow Jones is around 16,500. The S&P 500 is around 1960. Quick math will show you both of these market indices are up about 10 times over in this 30 year hypothetical retirement of yours. That’s right — up ten times over in 30 years. Now, a question: Did anything bad happen during the last three decades?
Where shall we start? Black Monday, 1987, when the DJIA fell 23% in one day? The Gulf War in 1990? The collapse of Long Term Capital Management (which threatened to bring Wall Street to its knees) in 1998? The terrorist attacks of 9/11? The tech meltdown of 2000-2002? Operation Iraqi Freedom? The Great Recession of 2008? Puzzling, isn’t it? In the face of all these world ending cataclysms over thirty years, an abiding faith in the future rewarded you with a substantial rise in your wealth – and your retirement income – by simply staying invested through all of it and not giving in to fear, greed, or media hype.
Today, we find ourselves in the middle of yet another market correction. The news outlets are spewing never-ending rhetoric about the “China Syndrome”, the Fed’s hapless interest rate policies, and “bubbles” in stocks, bonds, real estate, etc. Since it’s my anniversary, I thought it an appropriate time to share with you what 30 years of observation have taught me:
The world is always ending. It just never ends.
Through 30 years of tragedy, bad news, and crises both foreign and domestic, patient investors have been handsomely rewarded by simply embracing three basic principles: Faith in the future, diversification, and asset allocation. We have no evidence to suggest these three principles won’t continue to reward investors for the next thirty years. If we did, we’d tell you.
The four most dangerous words in investing are, “It’s different this time.”
If you are approaching retirement today in the face of all the financial pornography we are bombarded with daily, it’s increasingly difficult not to give in to it. It is not different this time. It’s just a different cast of characters selling fear to anyone willing to buy it. Until the great companies of the world are no longer interested in creating profits and growing, it will never be different. The investment markets are still the greatest wealth creation engine in history and the single best opportunity you have for growing your wealth during a 30 year retirement. It just doesn’t happen overnight.
Patience – especially in adverse times – is truly a virtue.
Diversified portfolios have produced a couple of lackluster years lately. This sometimes causes investors to want to “do something,” thinking it will improve their outcomes. When you “do something,” it presumes you know something about the immediate future. No one does. There is no crystal ball for when markets will advance or decline. What we do know is that they are in a permanent state of advance punctuated by temporary declines.
Timing the markets doesn’t work – period.
If it did, we’d be doing it. There is no historical or scientific evidence to suggest anyone has figured out the secret formula to getting in or out of any investment at the “right” time, because timing requires you to be right at least twice in a row, not once. More importantly, if my 30 year example above is true (which it is), why on earth would you even try?
Markets decline all the time – so get used to it.
Since 1985, the S&P 500 has had inter-year declines of 10% or more 15 times, or an average of once every two years. It’s had inter-year declines of 20% or more 6 times, or once every five years on average.* It’s normal and natural. The price we pay for the advances is the declines. If the declines went away, so would the advances. And through all this – up ten times over in thirty years.
No matter your age, you’re never done investing.
If you’re still working and accumulating wealth, you should use these declines as an opportunity to buy more. After all, markets have risen to new highs after declines exactly 100% of the time throughout history. If you’re already retired, declines present an opportunity for your financial advisor and money managers to rebalance and reposition your portfolio for the eventual rises that have always occurred following past declines.
As I reflect on the past thirty years, we’re grateful to have so many wonderful clients who have embraced these timeless lessons as the true path to wealth management. It’s my hope we’ll be here for another thirty years to continue this legacy for the next generation as well. Thank you for your continued confidence. We pledge to continue to earn your trust every day.
Jeff Helms, CFA
*Source: First Trust Advisors, Bloomberg