2016 is off to a rough start. Markets around the world have taken serious hits. According to some of the forecasters out there, the apocalypse has arrived.
Now is as good a time as any to take a step back and try to look at the situation objectively.
We’ve had good markets for nearly a decade. The last time the S&P 500 Index was negative for the year was 2008 (that one was a doozy, though). After such a long run of good returns, everyone seems to be waiting for the other shoe to drop, and the “experts” are vying to be the one who calls the next bear market.
But here’s the thing about financial markets – they bounce around. It’s like predicting that the Cubs will lose – it’s inevitable but pretty much impossible to know exactly when.
We invest for the long term, not for the high score. Your portfolio should be built around meeting your goals, which requires a portfolio that will help you stay disciplined and stay the course.
With the right portfolio in place, you’ll be able to harvest long-term market returns so you can meet your goals. Getting nervous and selling when things start going south just locks those losses in.
This Is What Markets Do
The last time the S&P 500 Index was down for the year was 2008. We’ve had seven straight years where the markets have been up. Before that, we had positive years back to 2002 when the tech bubble burst. They haven’t all been spectacular years, but it’s been a pretty good run.
But if a market goes up, it can also go down.
If we look at the S&P since 1926, the market has been up on an annual basis 73% of the time. That also means that, on average, the market has dropped a little more than one out of every four years. This doesn’t mean we’re “due” for a bad year – the markets don’t work like that. It’s simply a reminder that markets don’t always go up.
Lots of folks are saying the sky is falling and it’s time to sell everything and run away. Maybe they’re right (although I seriously doubt it), but they don’t know what will happen any better than you or I. We can’t say this enough: It is impossible to predict what the markets will do.
The financial markets absorb new information and adjust prices nearly instantaneously. By the time you read a piece of financial news, the market is already taking your reaction (along with everyone else’s) into account and moving on to the next thing. Until crystal balls start actually working, we won’t be able to tell what the markets will do.
Our best source of information about the future (however imperfect) is the past. The markets had, have, and will always have some reason to blow up. And yet, the S&P still goes up 73% of the time.
Over the course of nearly a century, the market has shown a clear trend – up. That’s not a fact of nature. Investment returns are compensation for taking investment risk. If we never had periods when the markets went down, there would be no risk.
You Can’t Time the Markets
It would be great if we could pull our money out before the market went down, but there is just no way of doing so. We don’t know what the market is going to do next.
Leaving that (massive) problem aside, market timers have another one to deal with. Big up and down days tend to cluster together. When the market is swinging around movements get magnified because there is so much conflicting information flying around and the market is reacting to all of it. This usually results in the market taking big up and down swings, which puts some of the market’s best days right next to some of the market’s worst days.
Take last year. The worst day for the Dow Jones Industrial Average came just two days before the best day (August 24 and 26, respectively). Even if there was a way to increase your odds of guessing where the market is going, you still have a serious problem – actually, two problems. You need to be right about both when to get out and when to get back in.
Market timing is not an easy task, and the consequences of being even a little wrong are severe. It’s a game you don’t want to play.
So where does this leave us? Where we have always been: Put your head down and focus on the long term. No magic algorithm or charting technique will give you foresight into where the market will go tomorrow, next week, or next year.
Stick with what has always worked: a boring diversified portfolio that helps keep you disciplined in the face of anything the markets throw at you. Discipline is the key. If you stay the course and stay focused on why you are investing in the first place, you will be in the best position to meet your goals.
 All S&P 500 Index data courtesy of Dimensional Fund Advisors
 Dow Jones Industrial Average data courtesy of Samuel H. Williamson, ‘Daily Closing Value of the Dow Jones Average, 1885 to Present,’ MeasuringWorth, 2016.
McLean Asset Management Corporation (MAMC) is a SEC registered investment adviser. The content of this publication reflects the views of McLean Asset Management Corporation (MAMC) and sources deemed by MAMC to be reliable. There are many different interpretations of investment statistics and many different ideas about how to best use them. Past performance is not indicative of future performance. The information provided is for educational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy or sell securities. There are no warranties, expressed or implied, as to accuracy, completeness, or results obtained from any information on this presentation. Indexes are not available for direct investment. All investments involve risk.
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