“I don’t know a soul who’s not been battered … I don’t have a friend who feels at ease; I don’t know a dream that’s not been shattered … Or driven to its knees. But it’s all right, it’s all right, for we’ve lived so well so long.”
— “American Tune,” as performed by Paul Simon
That markets are complicated is, admittedly, a cliché. Thing is, it doesn’t mean it isn’t true.
Volatility returned with a vengeance on Feb. 5 when the Dow Jones Industrial Average tumbled almost 1,200 points in one day, falling from 25,520 to 24,345. The drop was especially jarring, coming on the heels of 2017’s record low volatility. It was also a not-so-subtle reminder that stock prices do not ascend relentlessly.
Historically, stock prices have indeed moved inexorably higher over time. On Dec. 31, 1990, the Dow closed at 2,633. So from the last day of 1990 to Feb. 5 of this year, the Dow gained 21,712 points, meaning that the Dow Jones is more than eight times higher now than it was 28 years ago. And that growth occurred in spite of the dot.com bubble and the Great Recession. These numbers would certainly suggest that not being invested in markets can cost you a lot of money.
That said, the climb in prices from 2,633 to 24,345 over this 28-year period was anything but steady and smooth. On Dec. 31, 2007, the Dow closed at 13,264. But on March 9 of 2009, it closed at 6,547, meaning that in about 15 months, the Dow declined by more than 50 percent. So if you had $1 million invested solely in the 30 companies of the Dow Jones (and few people do, of course) at the end of 2007, 15 months later your investment account would have been worth less than half a million.
March of 2009 was the trough of the Great Recession. Not only were markets tanking, but the economy was teetering on the brink of collapse. Stocks began rebounding later in 2009; it took much longer, though, for the economy to right itself. Nine years later, our concerns have turned to inflation and interest rate hikes, driven by higher wages.
Long term, stocks are likely to outperform most other investment instruments. But if we want to make money in the market, we’ve got to consider our time horizon (how long we want to or will likely remain invested), and we’ve also got to endure some occasional downturns and volatility. When we are surrounded by steady growth and low volatility, as we were last year, it’s easy to forget that markets do indeed fluctuate, and corrections occur occasionally. That we haven’t seen either in a while sometimes makes it painful to remember that both are part of the deal.
Margaret R. McDowell, ChFC®, AIF®, author of the syndicated economic column “Arbor Outlook,” is the founder of Arbor Wealth Management, LLC, (850.608.6121 – www.arborwealth.net), a “fee-only” registered investment advisory firm located near Sandestin.