Taking Stock


This week sure has been a wild one! It has been some time since we have had this kind of volatility, so it has come as a shock to some. Let’s look at the triggering event for this volatility, and what relevance it has to long term investors.

The Chinese stock market has not been strong lately. Below is a chart of the Shanghai Composite (curtesy of CNN Money). Notice how volatile their market is. This is because their market is largely dominated by individual investors (retail investors). Little investors like me and you. Contrast that with the US Market (S&P 500 index in the chart) which is largely dominated by institutional investors. Notice how much of a run up there was before this crash; almost a tripling of value. There are two major forces that always drive markets: fear and greed.   This is clearly and example of the later.


The volatility in the Chinese stock market has had spillover effects into other global stock markets, at least in the immediate term. It is a globally connected world today, so this is not to be unexpected. But it is important to take an assessent of what markets have done as a whole year to date and see if that is in any way out of the ordinary.

As of 8/25 the S&P 500 (large US stocks) are down about 8% year to date. International stocks as a group have actually done better, down about 6% (as measured by the MSCI ACWI ex US). The point being, none of those numbers are in fact, unusual. How many years, on average are negative in the US Market vs positive?  One in 10? One in 6? Well, going back to 1900 it has about one in every four years. If you are going to be a successful long term investor, you have to accept that 3 steps forward, one step back is an inevitable and expectable part of the process. Because the media is very interested in selling fear, they will sensationalize what is going on, and try to paint the direst picture possible. Don’t be fooled. Bad investment decisions are made in the heat of the moment. Remaining grounded, calm, and sticking to the plan are the keys to long term success.

Investor Patience

Watching the Grass Grow.

Watching Paint Dry.

Waiting for a Pot of Water to Boil.

Long Term Investing.

Some things in life take a lot of patience.

For many long term, diversified investors, it wasn’t too concerning that 2014 was a relatively flat year. After all, most people can understand that the market doesn’t always go up- and flat feels better than down. However, some investors may be getting to feel a bit squeamish that 2015 is playing out in the same fashion- or perhaps going in downward direction in light of the most recent moves.

Have you ever heard the saying “there is nothing new under the sun?” Well, the same can be said of the markets. All manner of market behavior has been, and will be, experienced in the future. Bull markets, bear markets, and yes, flat markets. The only alternative is that view is that this market correction is indeed the end of days (and in that case, the value of your IRA will soon be irrelevant). I personally don’t believe that this is the case.

We don’t have to look too far back to see examples of time periods where portfolio values did not make progress. If I look at the GIPS audited returns from one of the managers we follow, their long term growth portfolio essentially broke even from March of 1998 through March of 2003. That is five years of ups and downs, but with no overall progress. Even more recently we can see the same thing from early 2006 until the third quarter of 2011- over a 5 year period.  Investor gains are not made evenly over time.  They are made sporadically and quickly, with no discernible pattern.   Investors run into problems when they become frustrated– or scared and sell out or change strategies. When the next market uptick occurs, they are left on the sidelines and do not participate in the gains. Market corrections are in a way transfers of wealth from those you cannot hold on, to those who are disciplined and instead see opportunity.

Disciplined investor behavior is the biggest factor in determining your investing success. If you are not a client of ours, is your advisor talking to you about market volatility, or providing monthly educational opportunities? If not, perhaps it’s time to fire your broker, and hire a financial coach.