Stocks Suffer Biggest One-Day Wipeout in Value Since March 2020
Nasdaq plunges 6%, S&P tumbles nearly 5% after Trump tariff blitz; Dow slides 1,679 points (Wall Street Journal today)
Now there's a headline guaranteed to create a Maalox moment! I'm reminded of the old Henny Youngman joke (younger folk, ask your parents): "Doctor, doctor I've got this really bad pain, what could it be?" Doctor: "Have you had it before?" Patient: "yes." Doctor: "Well, you've got it again!"
In light of what’s going in Washington and responses globally I thought this might be a subject worth revisiting from a previous time in recent history. This is what I wrote on November 28th, 2012 during a similarly troubled and politically charged time. And I've written similarly on multiple other occasions. I'm sure, upon reflection, it will sound quite familiar.
OMG What Do I Do If We Fall Off The Fiscal Cliff (or we don't)?
The media just loves what's going on in Washington these days. You cannot escape all of the so-called experts prognosticating about all of the doom and gloom scenarios that are about to occur or will occur if the denizens of the Potomac don't reach some sort of "Grand Bargain" or even a mini agreement on the budget (good luck there, we haven't had one for going on four years), taxes and spending cuts. We're seeing the equivalent of the old media admonition: "if it bleeds, it leads" being played out morning, noon and night on both the conventional news channels as well as cable news and the financial news.
So, I pose a question with the above headline. What's my answer regarding what one's to do? NUTTIN!
If you're a trader or speculator in the market or you expect to have to access your funds in the near future, then the fiscal cliff does pose some short-term danger for you and you'd be best served by sitting on the sidelines. Of course, I don't endorse any of these short-term speculations in any case nor do I engage in them for clients, so clients receiving this letter can sit back, relax and read on.
The reality is that if you are a serious "investor" who has a long-term game plan in place, the short-term impact -- either positive (who knows) or negative, is of no serious consequence to you. Those who attended our recent event were apprised of all of the negative events that occurred in each of the decades from the 20's up through the end of the most recent one. These involved wars, assassinations, recessions, the "great depression" and all sorts of terrible events that occur on an ongoing basis to mankind. The fact of the matter is that regardless of when you look at any time period or even out into the future, I can guarantee that there will be something terrible occurring here at home or somewhere else in the world. This is the nature of humankind. We have always lived in dangerous times -- but yet, we have always managed to somehow muddle through. More to the point: if we couldn't, wouldn't our investments be the least of our problems?
As an illustration, I've provided below, a very simple example of, perhaps, the worst economic period in our nation's history -- the 30s, which included, among other things, the great depression, the rise of the Nazi's and the start of World War II. I've listed some of the more infamous of these events below.
In light of the recent past, where we've seen investors dumping equities and running to the sidelines, both on their own and/or encouraged by their facilitating advisors, due to the two bear markets that occurred (Dot.Com / Tech Bubble bursting and the Real Estate collapse) many think that this is, in fact, the worst possible economic time since the great depression.
To illustrate the fallacy of this thinking, below I've provided a chart which illustrates a very simple, plain vanilla portfolio. One that would be fairly typical of a serious but moderate investor: 70% allocated to a diversified portfolio of U.S. equities (large, small, value, growth) and 30% allocated to short-term fixed income, with the portfolio rebalanced periodically to maintain that allocation. We've used all U.S. stocks because this time period did not encompass foreign companies as might be found in emerging markets or the Far East or developed Europe today.
You will note that if the decade of the 30's was started out with $100,000 sitting in the account, by the end of this tumultuous decade, the account would have grown to $152,000 (see chart below). While this isn't quite shooting the lights out, it is a far better return than waiting on the sidelines for things to appear sunnier or more opportune. Moreover, if you will look at the red line on the chart, which represents the consumer price index, you will see that it actually declined (deflation) so that your dollar actually bought more at the end of the decade than at the beginning! That, my friends, is a "real" rate of return. Click on the below link.
The same can be seen in every decade of the last century and this, but I felt that the period of the great depression would be the fairest way to illustrate this point: long-term investors who are fully diversified and disciplined have nothing to fear from short-term events -- even the most horrible ones you can imagine!
1930's
1929 - 1940 U.S. & Global Economic Depression
1932 - 1933 Holomodor Starvation (man made starvation in the Soviet Union)
1933 Nazi's come to power
1933 - 1945 The Holocaust
1935 Presidential candidate assassinated (Huey Long)
1935 - 1936 Italian - Abyssinian war
1936 - 1938 Stalin's purges (including the Gulags)
1936 - 1939 Spanish Civil War
1939 - 1945 World War II
Selection of funds, indices and time periods presented chosen by client’s advisor. Indices are not available for direct investment and performance does not reflect expenses of an actual portfolio. Past performance is not a guarantee of future results. Graph represents a hypothetical investment of $100,000. Performance includes reinvestment of dividends and capital gains. Source: DFA Returns Software 2.0, Feb 2011.
I hope you all had a wonderful thanksgiving and despite whether you're happy or sad at the election outcome or what we're being battered with by the news media, we should all realize that we have a great deal to be not only thankful for but to look forward to in our future!
Copyright (c) 2012
Frederick C. Taylor
All Rights Reserved
Permission granted to share or distribute -- with attribution.
Frederick C. Taylor CLU, CFP®, AIF®