A Pocket Full of Memories
I want to formally declare my gratitude for the iPhone. As a father of three little ones, I’ve really enjoyed the daily alerts that highlight my photo memories. These short little slide shows display recent memories, which always provide some good laughs—sometimes tears—as I’m reminded of just how quickly life can move.
Just Three Feet Tall
A recent memory highlighted a Disney trip with my eldest. He was a newly minted 4-year-old and was eager to try each and every ride. I’d ask him, “You want to try ALL of them? Are you sure?” and with a smile ear to ear he confirmed his excitement and expectation to try each and every ride.
The funny thing about Disneyland is that at just 3 1/2 feet tall, you can indeed ride almost everything. So, off to the Guardians of the Galaxy (formerly the Tower of Terror), we went. For those not familiar, this ride has some quite dramatic drops, and what would be assumed to be a bit intense for someone who was three years old just last week. Not to mention that during this time of the year, the ride operated in the dark. So all those familiar thrills and surprises, but in the pitch dark. Yet, my little boy was determined to do it all, and I was curious to see how this would play out.
The photo captured at the peak drop of the ride provided all the description you’d need. The poor boy had a look of sheer terror on his face. I asked him after, “Did you like it?” “Yes… but not again, Daddy, no more of that ride.”
What Goes Up…
Rollercoasters and theme park rides are an interesting mystery. Humans typically hate surprises, despise uncertainty, and just don’t like to be frightened in general. Yet, we come to a theme park for just that. For the thrill, the excitement, the uncertainty, and I suppose for those moments where we can test the limits of our courage.
At a recent client dinner in Texas, David Bahnsen shared about how current market valuations are stretched above their historical average and that markets look to be overvalued or expensive. A very simple and easily defensible claim. He concluded that valuations are mean reverting and that, eventually, stock prices (on average) would need to recalibrate to their relative earnings. Come Q&A time, one curious voice in the audience wanted to know if this [reversion] was inevitable or if perhaps these higher-than-normal valuations (P/E ratios) could, in fact, be the new normal. David provided a thorough response, but one sobering and humorous comment stood out, “… because that’s how gravity works,” he said.
As Issac Newton described it, “What goes up must come down,” or as the German proverb wisely states, “Trees don’t grow to the sky.” All that to say that even the stock market must submit to the laws of nature.
Key Word: Expectations
Yet, there is a huge difference in expectation between an investor in the stock market and a joy-seeking thrill-enthusiast at a theme park. Again, my son wanted to test the limits of his courage—to be jostled, to be uncomfortable, and to feel the full force of those drops. Investors do not.
I will highlight that word again: expectations. The rollercoaster junky expects this to happen. As that coaster is ratcheting up the incline, you know at each click, clink, and clank you are inching closer to that apex and the start of the descent. Most investors suffer from a sort of self-inflicted delusional amnesia where they want to believe markets only go up.
Here are the return figures of the S&P 500 over the last 4 months:
- November +9.13%
- December +4.54%
- January +1.59%
- February +5.34%
As of this writing, March is up month-to-date roughly 2%. [source – Y Charts March 28, 2024]
What does this all mean? It means that at some point markets will take a step backward. A violent crash? I don’t know. A deep hole that requires a multi-year recovery? I’m not sure. When will this happen? I, nor anyone else, knows this answer.
Get Acquainted with Normal
THE. MOST. IMPORTANT. PART. Is that this [a drop in market prices] shouldn’t be feared and it shouldn’t cause anxiety because THIS. IS. WHAT. MARKETS. DO.
Whether that be two steps forward and one step backward or three steps forward and two steps backward, this is simply what markets do. History shows that human ingenuity, ambition, and grit result in a long-term positive trend for stock market returns—a positive trend made up of gyrations—up and down—along the way.
A Timely Discussion
I’m keen on writing this now, not because I have a crystal ball telling me a drop is on the horizon, but rather because I know investors who haven’t felt some downward pressure recently tend to forget it exists. That short-term memory loss fuels anxiety, fear, panic, and maybe worse of all—false expectations.
Let me help you set the right expectations. In the last 44 years, markets have delivered a positive return in 75% of those years—the majority of the time. Over those same 44 years, the average intra-year drop (from the peak to the trough) has been over 14%. That’s right, a 14% drop is the norm; it’s what should be expected.
Sometimes it helps to convert percentages into dollars. If you have a $1,000,000 portfolio value printed on one of your statements, then at some point during that year an $860,000 print should be… normal and expected.
A Healthy Reminder
When you’re running on a 5-month win streak, this is just a good reminder and truth to keep in your back pocket. If our iPhones could only remind us of this – some slideshows of past headlines and drops to keep us grounded.
Does this mean that it isn’t a good time to invest new money? It does not. For most, if these new monies are coming from a cash position, a simple dollar cost-averaging entry plan could be an advisable solution. Like most planning matters, it just depends. Not to mention that one could easily adjust their shopping list to companies with more attractive valuations.
So, whether it’s rollercoasters or stock markets, you just want to know what to expect. Sure, there will be the unexpected, but it’s still possible to enjoy the ride. Let history be your guide, don’t let the short run captivate all of your attention, and of course, don’t shy away from testing the limits of your courage.
Trevor Cummings
PWA Group Director, Partner
tcummings@thebahnsengroup.com
