A quarterly newsletter written by Brook Menees, CFP®
I remember attending a client’s wedding years ago and, because we had an infant at the time, Michelle was unable to join me. At that wedding, an attractive woman with a wedding ring on asked me to dance. Because I enjoy a good party (after all I'm Scottish, Irish, and English!) and I was confident in MY intentions, I agreed. Four songs later, I needed water and a break. I thanked her for asking me to dance and headed to the bar to get ice water. When I turned around, there she was again, a drink in hand and interested in conversation. I was sure to ask about her husband and if she had kids in hopes that this would make clear that I had no intention of this going any further. Unfortunately, this did not dissuade her. She persisted and made it clear to me in no uncertain terms that her arrangement with her husband was "flexible". I communicated to her that mine was not - I love and am completely committed to Michelle. I told her I was flattered but not interested and she headed back to the dance floor presumably to find someone less committed. I am admittedly far from perfect but very happy to have passed this test.
What's the point of sharing this story? The point is that every one of us will be tested in life. Our relationships will be tested. Our beliefs will be tested. Our moral strength will be tested. Our fidelity and honor will be tested. Our judgement will be tested. Our health may be tested. Our commitment to many things will be tested. If one is blessed to live past puberty, one will certainly experience at least one of these tests if not most. And during our formative years, we will certainly fail some of these tests just as I did when trying to determine who I was and what I stood for early in my life. The question is always…”How will we react when tested?”
Let's discuss another test taking place at this time. January has proven to be quite a test to the idea that investing in publicly-traded stocks, both US and international, is still wise and one of the best ways of compounding our valuable, discretionary income over time. According to Dow Jones, Inc., the first week of 2016 provided the worst, first week in the US market's history. Additionally, the six-percent drop was the worst week in the Dow Jones Industrial Index since 2011. It was also the worst week for the Russell 2000 stock index (US small-cap index) in four years. With one week to go in the month, this is proving so far to be one of the worst January's on record. Is this just a correction (10 - 19.99% pull-back) or is it the beginning of a bear market (price decline of 20% or more)?
The thing is, there is not a soul on earth who knows. There are many who BELIEVE they know but the reality is that they are making a prognostication and only time will tell if they are right or they are wrong. Is it China's fault? Are the drops in oil and natural gas prices to blame? Did the US market simply get too expensive relative to the earnings our companies are generating in the prior or in the upcoming year? Does the reason really matter?
What to do about it, then? My answer is the same as when I was tested years ago at that wedding...stay committed! Ownership in stocks (whether individually or in a basket of stocks) makes you an owner in the business or the businesses in the basket. Should you abandon your ownership in high-quality companies simply because some are choosing to sell? After twenty-three years of being in this business and after witnessing multiple corrections and bear markets, my answer to that is a definite “No”.
For those of you who owned a home during the housing crash from 2006 to 2010, did you panic and sell your home because your county appraisal was dropping over those years? And would you have been able to pinpoint the top to sell and the bottom to buy another house when housing prices were finally bottoming? Most people cannot and, consequently, most people did not. Yet many investors still kinda’ hope for this when it comes to their stock market investments? Funny, isn't it?
Why do you own stocks in the first place? Perhaps because you are aware that ownership of the stocks of good companies over longer time periods have rewarded investors like few other investments have. A committed investor needs to be committed to this idea, though, through good and bad times but especially when prices are dropping and investment statements show paper losses. Paper losses become actual losses only upon selling these shares while they are discounted in price below that which an investor paid. Everyone needs to understand that reconsidering your commitment to ownership in companies through stocks during a stock market decline is like reconsidering your ship design during a bad storm. The time to contemplate your stock market weighting in your portfolio is AFTER the storm has passed when cooler heads tend to prevail and when the panic has subsided.
You'll probably find that most of the companies you have ownership in still have customers once the worst is over, can still provide a needed product or service, and still have the potential to grow profits (and hopefully dividends as well) for many years into the future. Will some companies fail? Certainly! This is why diversification in a portfolio is so important. Are people still going to buy diapers, toothpaste, and toilet paper? Most likely they will. Are companies and individuals still going to need internet access, cell phone service, data storage, and office supplies? Most likely they will. Isn't it also usually true that the better time to add to one's ownership in these companies has tended to be when their stock prices are down because they are selling fewer of these products and services at that moment in time rather than more? It is precisely at these times when an investor's commitment to owning stocks is being tested the most that the best opportunities tend to take place.
In summary, I cannot say if the stock market declines of 2015 and 2016 are close to or far from being over. The way I see it, it’s foolish for me to spend a single second on this question since I cannot possibly know. Nor can anyone else. But know that just as storms in nature eventually pass and the sun eventually returns, so too should declines in global stock markets. I ask that you stay committed to your ownership in high-quality companies as they should outlast the storm just as you do. As always, I am here to answer any of your questions or concerns along the way as this drama plays out. Feel free to email or call me if you'd like to discuss any questions, concerns, or ideas you may have.
Keep the Faith,
Stock investing involves risk including loss of principal. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. No strategy assures success or protects against loss. Diversification does not protect against market risk. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through V Wealth Management, LLC., a registered investment advisor. Instrumental Advisors, Inc. and V Wealth Management, LLC., are separate entities from LPL Financial.