I try to pay attention to the news as little as possible, especially when it comes to the stock market. But sometimes it’s unavoidable.
The past couple of weeks was one of those times.
My twitter feed blew up with people freaking out about the stock market, and if I didn’t know any better I’d have thought the world as we knew it was about to collapse.
Luckily, I do know better. And I hope you do too.
What was all the fuss about anyways?
After a stellar 2013 (actually a stellar 2009-2013), the stock market was mostly flat for a few weeks to start 2014 before taking a sharp nosedive in late January.
Between January 22nd and February 3rd (last Monday) the US stock market1 dropped 5.7%. That’s a pretty big swing over the course of 12 days and caused a lot of the doomsayers to start predicting “the next big market crash”.
1 All references to “the stock market” in this post refer to the entire US stock market as represented by Vanguard’s VTSAX mutual fund.
But wait. Isn’t this just what the stock market does?
Why yes! Yes it is! Thank you for asking!
In times like this, when the media tries to whip us all up into a frenzy, it can be easy to forget that stock market swings are not only normal, but THEY’RE EXPECTED. That’s right people, the stock market will move up and down, sometimes rather rapidly. That’s just part of the deal.
But don’t take my word for it. Here are a few examples showing just how meaningless these big short-term movements can be:
- In August of 2013, the stock market fell 4%. The return for the year? 33.5%.
- In May of 2012, the stock market fell 6.7%. The return for the year? 16.4%
- In 2011, from 7/22 to 8/8 the stock market fell a whopping 17.8%! Scary!!! The return for the year? -0.12% (just about flat).
- In 2010, over the 2.5 months from 4/23 to 7/2, the stock market fell just over 16%. That’s a pretty big drop over a pretty long time! And yet, the return for the year was 17.3%.
So just in the past few years there are some pretty clear examples that big short-term market dips, even those MUCH bigger than what we experienced over the last couple weeks, are utterly meaningless in the big scheme of things.
But we can go even more extreme
Over the first 68 days of 2009 (from 1/1 to 3/9), after one of the scariest market years ever in 2008, the stock market dropped 24.63%. That’s almost 25% in just over two months!!! Time to panic right?
Maybe not. The total return for the year ended up being almost 29%. I don’t know about you, but I’ll certainly take that.
We can even go the other way
In 2008, after a rough January and February, the market rebounded to produce a 13% return from 3/10 to 5/19. Things were looking up!
Except that 2008 ended up being a horrible year for the stock market, with a total return of -37%. That’s right, NEGATIVE 37%! Maybe things weren’t so rosy after all?
What does this mean for you?
Look, I want to help you focus only on the things that are legitimately important. You’ve got financial security to build. You’ve got financial freedom to work towards. Those things matter. They are the financial foundation upon which you can build a happy life for your family.
And most importantly, those are long-term plans. They’re your plans. And they don’t change just because some talking head is yelling at you from the TV that the stock market is about to implode.
Investing is an important part of reaching your goals. It’s an incredibly powerful tool when used correctly. And good investors are the ones who create a plan with a long-term vision and stick with it through the short-term swings.
Now, I want to be clear that I’m not trying to predict anything about the stock market. There may actually be a big crash in the near future. There may not. I have no idea.
But what should be clear from the data above is that we can’t use the recent past to predict the future. It simply doesn’t work.
And besides, those kinds of short-term swings should already be expected as part of your investment plan. They happen. All the time. It shouldn’t be surprising when they do, no matter how many people on TV want to tell you otherwise. It’s just the nature of the beast.
Don’t let yourself get derailed by the shock news cycle that pretends this kind of everyday occurrence is the end of the world. You deserve better.
It’s your life. These are your plans. Stick with them.