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Last year — 2018 — was the worst year for stocks since the 2008 market collapse. In the last few months, the market plunged nearly 20%. Most prognosticators were convinced that winter had finally come and a bear market was here to stay. Yet since Christmas, when many investors decided to cash out and sit on the sidelines to “wait things out,” the market has rebounded 2000 points and made the market timers look silly once again.
When we wrote UNSHAKEABLE (released in late 2016), this was the type of market we had in mind. We had been in a prolonged bull market, the longest in history, but at some point, but we knew the market would do what the market always does—correct or crash.
Let us be clear: nobody has a clue how to accurately time these downswings. As Warren Buffett says, stock forecasters only exist to make fortune tellers look good. But that doesn’t make their predictions any less gut-wrenching. When Tony sat down with Vanguard founder Jack Bogle, who has been an investor for 65 years, he asked the investing legend how he handles such moments, as he too experiences the heartburn.
“How do I feel when the market goes down 50%?” he asked rhetorically. “Honestly, I feel miserable. I get knots in my stomach. So what do I do? I get out a couple of my books on ‘staying the course’ and reread them!”
So just how can one be unshakeable and make the right decisions during these tumultuous times? The first step is to arm yourself with the facts. In our book, we outline the seven “freedom facts” designed to give you both a sense of emotional freedom from the anxiety and a tactical guide to making good decisions. The reality is that these downturns can present significant wealth-building opportunities to those with intestinal fortitude. So let’s cover the three most important freedom facts here:
On Average, Corrections Have Occurred About Once a Year Since 1900
Corrections, defined as a decline of more than 10% but not more than 20%, happen at a remarkably frequent occurrence: once a year on average. This past decade has been a much smoother ride, and our short memories tend to forget these frequent tremors. Corrections are generally short-lived, lasting just 54 days on average. The good news? Only 20% of corrections turn into bear markets. This means that four out of five times, the market shrugs it off and moves higher.
Bear markets (which involve more than a 20% drop) happen every three to five years on average. If you are 50 years old, you can plan on experiencing six or seven (or more) in your lifetime! So although the U.S. market has always gone on to new highs, these rough patches are simply part of being an investor—a pill that’s tough but necessary to swallow if one wants to keep their sanity. It’s better to embrace it like a storm that will certainly pass, or even better, see the opportunity these times present.
Nobody Can Predict Consistently Whether the Market Will Rise or Fall
This one is pretty straightforward to understand but harder to ignore, given today’s 24-hour news environment. Many prognosticators will tell you that they accurately predicted X correction or Y crash. But keep in mind that even a man with a broken watch is correct twice a day. As wise sage Jack Bogle says: “Sure, it would be great to get out of the stock market at the high and back in at the low, but in 65 years in the business, I not only have never met anybody that knew how to do it, I’ve never met anybody who had met anybody that knew how to do it.”
The lesson? Making decisions to be in and out of the market is a recipe for losing money over the long haul, not to mention extremely inefficient from a tax perspective. Which leads us to the final and most important fact to remember.
The Stock Market Rises Over Time Despite Many Short-Term Setbacks
The S&P 500 index experienced an average intra-year correction of 14.2% from 1980 through the end of 2015. But you know what really blows our minds? The market ended up achieving a positive return in 27 of those 36 years. That’s 75% of the time! And the odds of the market being up in any 10-year period is well above 95%. The market is incredibly resilient because American business is incredibly resilient. In Buffett’s 2015 letter to Berkshire Hathaway shareholders, he explained: “This all-powerful trend is certain to continue: America’s economic magic remains alive and well. For 240 years, it’s been a terrible mistake to bet against America, and now is no time to start.”
That sounds rosy, but what about today? Why is the market dropping like a rock? These are fair questions.
The market really only cares about one thing: anticipated earnings. It doesn’t matter how much companies have made in the past—the market only cares about the future expected profits. A company’s stock price is simply a reflection of that earning power. The market rises in anticipation that future earnings will be good enough to justify the price per share paid today. It also declines if it anticipates that future earnings will be lower, because the market sees a lot of factors that may negatively impact future earnings. These factors include all of the things everyone is talking about, including interest rates, tariffs, and political turmoil. In short, the market is concerned that the combination of all of these things, to varying degrees, may cause companies to do less well in the future. The market is afraid of, what economists like to call a recession.
This is where it’s important to note that although we are discussing the U.S. markets, most intelligent investors will not only invest in U.S. companies. A globally diversified portfolio with various asset classes is crucial for smoothing out the ride.
So how does an unshakeable investor view these uncertain times? The unshakeable investor recognizes that the stock market is the only thing people don’t tend to like when it’s on sale. The unshakeable investor sees bear markets as an opportunity to put cash to work or rebalance other assets classes into cheaper stocks.
As a case in point, the Dow Jones was at 6,507 on March 9, 2009. Today we are at over 23,000! Those who remained unshakeable were buying stocks at deep discounts and reaped the rewards.
We must remind readers that these strategies are not for everyone, and individuals should consult a professional before making investment decisions, but the point we are trying to make is that becoming unshakeable isn’t about being zen in the midst of the storm—it’s about taking positive actions that could greatly increase the pace at which portfolios recover when the market resumes its climb. So take the time to educate yourself on how markets work, and how you can take advantage of these volatile times so you can have peace of mind on your journey to financial freedom.