The bad news keeps coming and the volatility in the market continues. As you have surely learned by now, “volatility” is a more sophisticated way, slightly more nebulous way of saying that we’re seeing a lot of days wherein the equities markets are finishing down.
What you may not realize is that even when times were better… meaning long stretches of years when the market seemed to be doing quite well…there were still a lot of days in those years which saw the arrow, by the conclusion of the trading day, pointing south. It’s easy to think that such was not the case, but it’s true.
So what gives? What’s the difference? Why do things seem so much worse now than they used to?
To be fair, over the last decade, things have been pretty lousy. In the first ten years of this new millennium, the average annual return of the S&P 500 was negative (barely negative, but still negative), which is admittedly rare. However, it’s no secret that the return was heavily influenced by the single, extraordinarily bad year of 2008, when it was down over 37%.
However, it’s worth noting that from 1969 through 2010, the market, as characterized in this case by the comprehensive S&P 500, finished to the downside just under 50% of all trading days in that period.
How could that be, if the average annual return during that time was nearly +10%? Putting it simply, it’s because even though the number of down days came close to matching the number of up days, the up days, overall, were more up than the down days were down.
We can find a big part of the answer as to why things seem so bad for investors by looking at media influence. This is not a case of blaming the media for anything nefarious, but just that the 24/7 information age in which we live tends to make good news seem better and bad news seem worse than both really are. The reality is that we learn about things more frequently and with greater sensory force than we used to, so it follows that we react more strongly at psychological and emotional levels to the information, including news about the performance of the stock market.
The lesson is to keep everything in perspective. Yes, some things are different this time around in the current recession (and no, it’s not really over, despite what we are told), and we know that; and yes, we are facing long-term financial consequences like we’ve not yet seen as a country if we do not make a successful effort at getting back to the matter of making more and spending less, at all levels. However, as investors, we cannot look singularly at the number of down days in equities markets and draw conclusions, or make portfolio changes, simply on that basis; a casual glance at “data” like that can convey a dangerously wrong impression, if you’re not careful.
None of the information contained in the above article is intended to be, nor should be construed as, a solicitation or recommendation to buy or sell any security, or engage in any financial transaction whatsoever. At any given time, the author(s) may or may not own any of the securities or other financial products mentioned in this column. Furthermore, it is strongly suggested that you seek the advice of a financial professional before making any changes to your personal financial profile. To that end, we invite you to visit Christian Financial Planner.us (www.christianfinancialplanner.us), the free, online directory of financial professionals made available through Christian Money.com, as one possible resource to utilize in your search.
Comments