It’s true. Stocks went down. They do that, you know. Maybe we’ve forgotten. We’ve had something over 1,000 trading days without a 10% decline (which, by the way, we still haven’t had – as of October 9th, the S&P 500 is down less than 5% from the high in September, despite today’s drop over 2%). We had years without any material volatility. Stocks went up, maybe the Dow would drop 75 or 100 points from time to time, but no one took notice.
Suddenly, we’re taking notice. Big daily market swings are back. One day the Dow is up 200 points and the next day we’re down 200 points. It’s been a good reminder that investing in stocks isn’t always sunshine and rainbows and unicorns. At times, this gets difficult. Not that you need some overly complex strategy to be a successful long-term investor. You don’t need to increase the activity in your portfolio or spend a lot of time second-guessing your investment policy. If you’ve done good financial planning and have a well diversified portfolio you don’t need to worry about maintaining your retirement income either.
Not long ago my friend Morgan Housel reminded us that there is a difference between “average” and “normal.” That’s good information. The market rarely delivers “average” returns in any given calendar year. But it is very normal for markets to be up 20% one year and down 15% the next year. And it’s even more normal to see big swings of market performance within the year, or even day-to-day. Stock markets are volatile. It’s a simple fact, and we all need to accept it if we are going to make this work.
This is why I’ve spent the last year harping on having an investment plan that you can stick with. It’s why I repeat that your behavior, especially during bear markets, is a much bigger driver of your investment returns than your portfolio or your allocation. These things are easy to agree with when markets are humming along, but much harder to stomach when things turn south. So go back and read them again, if you don’t mind.