Don’t be a greedy chicken
There’s no doubt that big drops in equity indexes make headlines. They are often phrased to be sensational: “Biggest weekly decline in 2 years”, or “worst day since May,” or “Stocks fall for a third straight session.” Declines in stock indexes happen because of concerns, worries, and fears over one thing or another, which cause equities to tank, plunge, slide, retreat, or even crash. You can almost hear the exclamation points, even if the headline writers don’t include them!
But a wise investor will keep his or her composure in the face of such headlines – including the headlines we have been seeing since the S&P 500 dropped more than 5% from its all-time high back in early September 2021. While volatility may be up recently, volatility is a feature of stock markets, and it has been more muted over the past few years than it has been historically.
So, anticipating more sensational headlines about choppiness in stock markets, here are a few things to keep in mind:
- First, pullbacks are common, even “large” ones, and today’s market has seen fewer such pullbacks than is typical. When the S&P 500 dropped 5% from its all-time high in September, it had gone 227 days without a drop of that magnitude, the “seventh longest such streak on record,” according to Barron’s. Moreover, stock market pullbacks of 10% or more have happened in about 50% of the years since 2000. So even if the headlines make it seem like significant drops are remarkable, they are not.
- Second, pullbacks that make headlines are often measured in relation to an all-time high, which means that investors have been making money all the way up. During that 227 days between the last 5% pullback and the most recent one in September 2021, the S&P 500 index had gained 29.4%.
- Third, pullbacks are typically followed by a rebound. That means if you liquidate your stocks after a pullback, you lose the opportunity to benefit from any recovery. By far, the most common “large” declines in the S&P 500 are between 5% and 20%, and those are typically fully recovered in four months or less.
I have a term for investors who want all the return of stocks but don’t want any of the volatility or drawdown risk. I call them “greedy chickens.” Volatility is an embedded feature of the stock market; you cannot avoid it, and it’s the main reason you earn a return on your equity investments. Short-term sell offs happen periodically, and that’s what drives long-term return because risk and return are related. Don’t run from it. Embrace it and let it work for you.
We believe that investors should listen to their financial advisors, who should have a long-term strategic plan in place for investors’ portfolios. It may be wise at this point to have cash on the sidelines as a reserve to put more money to work when stocks are one sale. And try to maintain a long-term perspective, of 5-10 years or longer, when it comes to investing in stocks. For those with lower risk tolerance, or high-income needs, a balanced portfolio of stocks and bonds may reduce equity risk to a tolerable level.
But all investors need to remember that when stock markets get choppy, it’s easy to get angsty over potential drawdowns in the equity portion of the portfolio. We haven’t seen significant equity drawdowns for quite a while. And there are certainly difficulties on the horizon. Economic growth may falter. Politics may prove difficult. The delta variant may continue to cause problems. Corporate earnings may have topped out for the moment.
But any short-term declines in equities may very well present excellent long-term buying opportunities if you’re not a greedy chicken.
Author
Mitch York, CFA®
CIO
Concord Asset Management
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