Short-term Pain Leads to Long-Term Gain, Right?...Right?

Guess who’s back, back again…and I’ll give you a hint - it’s not Shady!! Ok fine, it’s me! After a bit of a break, I’m back with another Ticker Talking article. I’ll preface this by saying that this article has a similar thesis to my first post on Ticker Talking, but I felt that everyone could use a reminder about this topic as most have watched their wealth decrease by a fair margin over the last few weeks.

In my August market update, we were in the midst of a late-summer rally. Boy can things ever change in just a matter of weeks, though…last week stocks fell to their lowest level since November 2020, marking the worst September for stock market returns in two decades. The S&P 500 is down some 25% on the year and showing no signs of improving anytime soon. The Dow Jones Industrial Average officially entered bear market territory as it’s plunged by 20% from a recent high. Not to toot my own horn or anything (not that this was a particularly ingenious opinion to arrive at), but I certainly wasn’t ready to jump into the bull camp back in August due to the sheer amount of uncertainty that existed in the markets and on the geopolitical stage.

Inflation has continued to run rampant and the Fed has responded in kind, saying that it will remain steadfast in its mission to raise interest rates until there is “clear and convincing” evidence that inflation is cooling. These recent remarks have spooked investors as it signalled that additional large rate hikes are likely, and the risk of tipping the economy into recession seems to have risen considerably.

On the Russia-Ukraine front, a resolution to the war doesn’t appear to be imminent, with Russia recently announcing mandatory conscription of over 100,000 men, in addition to illegally annexing four Ukrainian regions.

So what does any of this actually mean for investors like you and me? There is certainly no shortage of volatility, and there seems to be bad news everywhere you look. What’s scary is that we may not even be near the bottom, and your portfolio may continue to go deeper into red numbers. However, your job as a long-term investor is to NOT CARE (easier said than done, I know)!! Don’t get me wrong, I hate watching my wealth decline just as much as the next guy, but as Vanguard’s Chief Investment Officer Greg Davis says, “it pays to remain invested and balanced precisely when it is most difficult to do so.”

Notice that Davis doesn’t say it pays to sell your positions and attempt to time the market and reinvest when the market bottoms out. This is simply because engaging in that practice is nothing short of fool’s errand. Part of the reason that timing the market is so difficult is because oftentimes the best trading days tend to cluster around the worst ones (See Exhibit A), and the significance of missing out on just a few of those rally days cannot be understated. For example, let’s say a particularly foolish person attempting to time the market was on the sidelines for the best 30 trading days dating all the way back to 1928. Unfortunately for this individual, despite having their funds invested for 99.9% of the time between 1928-2022, they would have netted a return amounting to only 50% that of the market during this period.

Exhibit A

Knowing this, it shouldn’t be surprising that the best years for the stock market are those immediately following a year with a bear market. See Exhibit B for a chart illustrating the percentage losses in the S&P 500 throughout bear markets since 1956, as well as the percentage gains in the ensuing bull markets.

Exhibit B

Exhibit C does a terrific job of breaking down market recoveries over 1 and 2 year periods, where the S&P returns, on average, 30% and 37%, respectively.

Exhibit C

I’ve thrown a lot of numbers at you here, but the bottomline is that this isn’t the first time the markets have undergone this kind of turbulence. There have been countless events that have turned the markets upside-down and sent the economy reeling, but each time both were able to rebound and emerge stronger than before.

Provided that Jerome continues to raise rates, and the market keeps heading south, you’ll see lots of investors head for the exits and panic-sell. While this is happening, I urge you to sit back and think about something Buffett said, which was to be “fearful when others are greedy, and greedy when others are fearful.” Right now there is plenty of fear which, according to Buffett, typically presents a good value investment opportunity.

So as intelligent long-term investors, you should be greedy and start funnelling money into the markets right away, because history tells us that waiting will cost you dearly. It feels like the market is dropping like a rock, but when you zoom out (literally - See Exhibit D) you’ll get a different perspective.

Exhibit D

Looking at the S&P 500 over the last 30 years of so, you’ll realize that in just a few years all of this chaos in the markets at the moment will just be another little temporary blip in the upward-sloping chart. I'll end this article exactly how I started it: with an Eminem quote, of course. It's possible that "you only get one shot, do not miss your chance to blow. This [investment] opportunity comes once in a lifetime." Fine, I may have added a word or two in there, and there will likely be another correction in your lifetime, but you get the point. Invest now and you’ll be glad you capitalized on the stellar investment opportunity a few years down the road.