Pro­fes­sion­al investors know some­thing that most peo­ple find impos­si­ble to believe: that the threat of scary ups and downs in the mar­kets is by far the best friend of the long-term investor. Why? Because over the long term, stocks have pro­vid­ed returns far high­er than bonds or cash. If it weren’t for the occa­sion­al dizzy­ing gyra­tions, any ratio­nal investor would put his or her mon­ey where the high­est returns have been. Right?

This appears to be one of those times–a time when non-pro­fes­sion­al investors are remind­ed of the rea­sons why they have this lin­ger­ing fear of the stock mar­ket. Since the end of Sep­tem­ber, the S&P 500 index has done some­thing reg­u­lar­ly that it nor­mal­ly does infre­quent­ly: moved more than a full per­cent up or down in a sin­gle day. Con­sid­er the recent pat­tern this month:

  • Oct. 1 ‑1.3%
  • Oct. 4 +0.05%
  • Oct. 5 +1.1%
  • Oct. 6 ‑0.2%
  • Oct. 7 ‑1.5%
  • Oct. 8 +1.8%
  • Oct. 9 ‑2.1%
  • Oct. 10 ‑1.1%
  • Oct. 13 ‑1.65%

Con­trast this to the calm before the storm: ear­li­er this year, the mar­kets expe­ri­enced 42 con­sec­u­tive days with­out a sin­gle 1% price move, and the accom­pa­ny­ing chart shows that this is far from the record.

Screen Shot 2014-10-17 at 12.49.53 PM

The ques­tion we should be ask­ing our­selves is: why are we pay­ing such close atten­tion to dai­ly mar­ket move­ments? Why are we allow­ing our­selves to fall for the trap of get­ting anx­ious over short-term swings in stock prices?

The sec­ond chart shows the growth of a dol­lar invest­ed in the S&P 500 at the begin­ning of 1950, with div­i­dends rein­vest­ed, com­pared with a vari­ety of alter­na­tive invest­ments which have not pro­vid­ed the same returns. (Note that small cap stocks, which are more volatile, have done even bet­ter.) The chart also shows all the scary head­lines that the mar­kets man­aged to sail through on the way to their cur­rent levels–all of which are scari­er than the things we’re read­ing about today.

Screen Shot 2014-10-16 at 4.24.13 PM

This is not to say that the mar­kets won’t go low­er in the com­ing days, weeks or months; in fact, we are still await­ing that cor­rec­tion of at least 10% which the mar­kets deliv­ery with some reg­u­lar­i­ty on their way to new highs, which has been long-delayed in this cur­rent bull mar­ket. The thing to remem­ber is that the dai­ly price of your stock hold­ings are deter­mined by mood swings of skit­tish investors whose fears are stoked by pun­dits and com­men­ta­tors in the press, who know that the best way to get and hold your atten­tion is to scare the heck out of you. What they don’t say, because it’s bor­ing, is that the val­ue of your stock hold­ings are deter­mined by the effec­tive­ness of mil­lions of work­ers who go to work every day in offices and fac­to­ries, farms, ware­hous­es, pow­er plants and research facil­i­ties, who slow­ly, incre­men­tal­ly, with their dai­ly labor, build up the val­ue of the busi­ness­es they work for.

The last time we checked, that incre­men­tal progress hasn’t stopped. The econ­o­my is still grow­ing. You won’t get a dai­ly report on the val­ue of the stocks you own; only the dai­ly, chang­ing opin­ions of skit­tish investors. But if you take a sec­ond look at the growth of an invest­ment in stocks over the long-term, you get a bet­ter idea of how that val­ue is built over time, no mat­ter what the mar­kets will do tomor­row.

 

Sources:

http://www.bespokeinvest.com/thinkbig/2014/6/17/1‑moves.html

https://www.jpmorganfunds.com/blobcontent/377/965/1323354460291_II-GROWTH2014.pdf