In my last letter, written just after large market falls in December 2018, I urged you to tune out the noise and remember that volatility is “an essential part of the journey to long-term returns… your portfolios are built to withstand fluctuations”. Many of your portfolios looked like a crooked smile in December, as markets across the world fell sharply while diversification and portfolio structure did its job by insulating you from serious damage:
“Talk less; smile more…”(Aaron Burr, Hamilton) The rebound from the lows of December has been as sharp as the falls; some markets are new highs. But, strangely, there are no screaming headlines; how about:
“$5 Trillion Got Added To Stocks This Year. Here’s How”
“The stock market is on pace for its best January since World War II”
“FTSE 100 leaps 10% in 2019 – its best quarter in a decade”
These headlines are noticeable by their absence. I believe there are a couple of simple explanations.
Only bad news is “news”
Firstly, there’s a general rule: bad news sells. If an alien arrived in London and read the news for a week, it would probably respond by cowering in an underground bunker for fear of being attacked, terrorised, knifed, shot or run over by a cyclist (!).
Is this a fair assessment? What are the facts of life in developed cities in the 21st century?
As far as we can measure, many of us are experiencing levels of safety, nutrition, education, health, wealth and freedom beyond the imagination of pretty much all of humanity until the last 100 years:
With thanks to Max Roser (@MaxCRoser) and Jim Richardson (https://eyeson.earth) Sure, there is a wide range of experiences lived by individuals amidst this general picture; there’s a homeless man who often sets up camp outside my local Co-op in an affluent, leafy suburb of one of the richest cities in the world.
But that doesn’t change the fact that the alien reading the papers would have got totally the wrong idea about life on earth.
The boring truth about markets
Secondly, there’s an explanation that is more specifically tied to facts about equity markets. Most of the time, they go up, and even when they don’t, they still generate income. If the news stories were written every time markets went up, it would soon become boring; it would no longer be “news”. Here’s a chart showing the progress of the US stock market since 2009, along with multiple warnings in the media that the best returns (“easy money”) were now in the past:
With thanks to Morgan Housel (https://www.collaborativefund.com) It’s far more interesting, instead, to make a huge song and dance about the instances when markets fall sharply and play on people’s fears of financial ruin (“recent falls are only the beginning… we are heading for apocalypse”) and regret (“we’ve missed out, let’s wait until there is a better opportunity” – as if those opportunities arrive in a gift-wrapped shiny box marked Buy Now).
House odds
You will get bored of me saying this but I make no apologies. Long-term investment returns are the result of patiently persevering through periods of panic or boredom; if you can do this, the odds are stacked in your favour, even if it does not feel like it quarter-to-quarter.
Veteran investor Jim O’Shaughnessy puts it like this:
"We can confidently presume that we will make the same mistakes and errors again, again and again. We will panic in bear markets and often sell near the bottom. We will become elated during bull markets and become more and more confident near the top… Yet I’ve also learned that it’s virtually impossible to forecast the ups and downs of markets. The good news is, if you are investing for the long-term, you don’t have to. Often in investing, the best thing to do is nothing. It’s boring. It’s incredibly dull. You won’t have any great stories about your market savvy at dinner parties. But if you can simply remain dispassionate about all the emotionally charged things happening around you day-to-day, you will come out ahead of virtually everyone else in the long-term."
Your portfolios are built so that you do not have to do anything. If you get the chance to add surplus cash to a diversified portfolio at any time, especially when the headlines tell you not to, that makes you the house, not the gambler.
- FS