Normally, we begin these writings with a summary of what’s been happening in the economy. Well, nothings really changed substantially since year-end. Economic growth continues to expand, employment remains robust, interest rates have actually declined, and markets have recovered from last year’s dip and resumed their inevitable advance. Since there hasn’t been a lot of economic change to report, we decided to take this opportunity to highlight a basic tenet we preach to investors that has once again been proven true.
Since 1985, we’ve consistently and steadfastly encouraged clients to embrace a few simple rules to ensure their long-term investment success. Embodied in these rules are the following:
1. All market declines throughout history have been temporary. The advances have been permanent.
2. Since we do not know deep the declines will be or how long they will last, investors must own a portfolio that will not cause them to misbehave during difficult times so they can enjoy the advances when they ultimately come.
Recent history has afforded us the opportunity to once again demonstrate the essential truth of these rules. We share these examples not as a “we told you so”, but as concrete reinforcement that this approach best serves investors. They need only embrace it. We have two examples to share with you; the last six months and the last ten years. Ready? Here we go:
As year-end 2018 approached, we witnessed the decline of every major investment class around the globe. The media offered multiple reasons: softer corporate earnings, worries about trade pressures, rising interest rates, and on and on. Of one thing they were sure: This recovery had gone on for too long, and a reckoning was nigh.
Now, let’s assume you went to a New Year’s Eve party to drown your sorrows. You imbibed a bit too much and decided to sleep in the next day. But instead, you slept for three months! Upon waking, you immediately grab the newspaper to see how badly things had deteriorated. You can’t believe your eyes! Stocks are back up in the double digits! Most of the world’s major asset classes had recovered from their year-end declines and begun their inevitable advances upward. All was right with the world again after three short months.
Now, let’s turn the clock back almost ten years to the day. It’s March 8, 2009. The stock market’s down 56% from its all-time high. Unemployment is over 8%. Real GDP dropped at an annual rate of -6.2%, and it feels like the world is ending. You’re tired, exhausted from living through this, and you fall into a deep sleep. So deep, in fact, that you don’t wake up until now – ten years later. First thing you do is run to your computer and see that the S&P 500 is up 305% since the bottom. “No way”, you say. Things were so horrible when you went to sleep. How can this be? You call your best friend to ask how things could have possibly gotten so much better. He pulls out a list.
First, he tells you about Apple. When you went to sleep, they had sold about 17 million iPhones. Since then, they’ve sold 1.3 billion of them. Then there’s Uber. Your friend tells you how you can push a button on your phone, and a few minutes later a car will come pick you up – cheaper than a taxi. Your friend then shows you a video of a self-driving semi-truck that Budweiser used to carry 51,744 cans of beer from Ft Collins, CO to Colorado Springs, CO – about 130 miles – with no driver. Finally, your friend tells you the US energy crisis is over. Oil production in the US has more than doubled, making the US the largest oil producer in the world. Texas alone is the world’s fifth biggest!
And notice, you have no idea who the President is, what’s been going on with interest rates, China, or North Korea. You’ve never heard of “AOC”, and you missed the whole Greek debt crisis.
All you need to know is this: Entrepreneurial spirit and capitalism have continued to revolutionize the world over the past ten years. That’s what’s been driving economic growth and the stock market – just like it always has. It’s just hard to see it when you only sleep for eight hours a night instead of three months or ten years.
We hope you’ll print out a copy of this and read it again during the next market downturn, because the results are always the same.
(This article was originally posted on April 4, 2019)