DOW is down 1,000 points! "Round up the usual suspects.."
Yesterday was Monday, February 24, 2020 and the market was down 3%+ and everybody seemed to know why. Or did they? Market explanations are almost as useless as market predictions (but not by much). Pick your story: was it Bernie's win in Nevada? The spread of the coronavirus? Unusual "bear" market activity or...just normal market behavior?
FEAR vs. REALITY
Monday February 24, 2020, 3:59 PM EST: Today the Dow Jones Industrial Average (DJIA) index dropped 1,030 points, the largest point "drop" in the market since February 8, 2018 and one of the top 5 point drops in history. The DJIA (-3.55%), like the S&P500 (-3.35%) are stock "indices" meant to be representative of the entire stock market. All of the 30 different companies that make up the DJIA traded at a lower price value today. All 11 industry sectors that make up the S&P 500 traded at a lower price value today. And none of that matters for long term investors.
As a percentage of the indices, this reduction in value doesn't even crack the top 50 of previous market reductions in history. For example, if you had about $100 in the market this morning, by 4 pm you had about $96.50. This isn't a preferred result for you (or our clients) but it is not an emergency.
As we stated in our February Economic Commentary, markets recover faster than humans. Most people don't watch the Consumer News Business Channel (CNBC) but if you are one of the few that read the newspaper or watch your evening news, there's little doubt that there will be screaming headlines about the market "Plunging!" "Diving!" and "Falling!" Via point total - which as stated above is not reflective of the percentage change - yes, the delta is large. But "the markets" have grown so quickly over the past 11 years that point drops are no longer relative to even the recent past. Don't be fooled. Yes, "the markets" may continue to rise and fall but that is what markets do. That risk of "volatility" is what makes the potential returns on your investments so much more attractive than what you can expect from your bank.
There are many television pundits who will share a reason for today's "sell-off" (note how many terms there are used to describe a market reduction). Some will merely say, "Stocks were too high for too long so this was inevitable" which is not too far off from reality. But others will claim recent events like the coronavirus news or that Bernie Sanders won the Nevada caucus. You can believe with relative certainty that they have no idea. If they did, they would have predicted this drop off on Friday of last week (and they would be much wealthier than they are now).
When "experts" want to make news, it's smart to define relatively normal activity with fear (coronavirus) or through the prism of politics (Bernie Sanders). It reminds me of a scene in one of my favorite movies of all time, Casablanca: "Major Strasser has been shot! Round up the usual suspects."
TRADERS vs. INVESTORS
All of our investment clients at Jason Howell Company (JHCo.) are investors; none of them are "traders."
What's the difference? A trader is looking for an advantage on a short-term (hourly, daily) basis to take advantage of the ups and downs of the market. For example, a "trader" might anticipate that Bernie Sanders won the Nevada caucus, is leading the Democrat field of Presidential candidates, could win the nomination and could win the U.S. Presidency, then could encourage the passing of "Medicare for all" legislation which reduce the profits of healthcare companies. In anticipation of that, a trader might have guessed that healthcare stocks would be down as much as 7.7% today (United Health Group, Inc.). We don't do that. Our investment philosophy is for clients who are saving for the long term (more than 10 years) and in so doing look for academic reasoning versus news headlines for buying or selling stock.
Our investment philosophy was summarized well in our November 2019 Economic Commentary, when we stated:
Our investment philosophy can be summarized as our best interpretation to date of NOBEL LAUREATE EUGENE FAMA'S research on the efficient market theory. He identified that value stocks outperformed growth stocks over long periods of time. This has historically, though not necessarily predictably, allowed for higher returns with lower risk when evaluated over decades. We take that concept one step further by investing in value proportionally across the entire world’s equity. For our investors who are interested in taking more risk with some of their money, we will have options for you in 2020. For the majority of our investors who are investing family money for the long term (perhaps generations), we will continue to follow an academically sound philosophy.
The market volatility (ups and downs) may continue down tomorrow. For traders, that's a big deal; for investors it's just part of the business. If you are nervous about your family's investment portfolio it may be because you are nervous about your investment philosophy. Ask your investment adviser about their investment philosophy and how it makes sense for your family's goals. And if you are going to read the financial headlines, remember that you are (more likely) an investor, rather than a trader.
That's the point where money meets meaning.
Jason Howell is a CERTIFIED FINANCIAL PLANNER™ professional, former U.S. Congressional candidate and President of Jason Howell Company (JHCo.). With an emphasis on sharing the "joy of financial planning" the Jason Howell Company develops parents into future patriarchs and matriarchs of their family and finances. Jason is the the author of JOY of Financial Planning: 7 Strategies for Transforming your Finances and Reclaiming your American Dream.
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