I recently watched the rock-climbing documentary Free Solo. It’s the story of how Alex Honnold prepared to achieve his lifelong dream: climbing the 3,000-foot face of the world’s most famous rock, El Capitan, in Yosemite National Park without a rope. What?
One would think that to attempt such a climb he would need to have overcome his fears long ago. During an interview following his successful summit, Alex was asked, “How did you learn to ignore the fear?” He responded with a laugh and said:
“It’s not that I ignored the fear, it’s that I systematically worked on it and expanded my comfort zone. The reason the film took two years was because it was really scary.” 1
It might surprise you to learn that our team at Steadfast Wealth Co. has the same emotions you do when it comes to investing—fear. The financial-services industry has done a poor job by asking you to “just not care” when your life savings drop precipitously during market cycles. We know that “not caring” isn’t a realistic strategy. You’re going to worry no matter how many times we communicate that remaining calm is the proper response … and that’s okay. It’s our human nature. But, as Honnold said before he began his climb, “You face your fear because your goal demands it.”2
It goes without saying that things feel odd right now across the board. Stocks feel overvalued, don’t they? Is a correction coming? Actually, the better question is whether you should do anything about it, even if it is.
I was sitting with some wonderful clients the other day and asked them to go back in time to the market peak of October 2007. I asked them to pick from a few different types of investments going forward: stocks, gold, real estate, Treasury bonds, etc. Whatever type of investment they chose, they would have to keep it for 10 years and then see what their results would be. The only piece of valuable information I was willing to share in this exercise was that the stock market had just reached a peak and would drop 54 percent within the next year.
What do you think they selected? You’re correct … certainly not stocks!
We human beings are hardwired to avoid pain. In fact, we all instinctively prefer lower actual growth than the risk of losing a portion of our hard-earned nest egg, even in a momentary loss. This is called “loss aversion,” and it’s a terrible toxin to your long-term objectives. First Trust, a well-respected investment firm, studied the performance of those same investments that a client could have chosen at the market peak, just prior to the financial crisis of 2008.3 Here is what they learned:
Take a look. At the 10-year anniversary of the 2007 market peak, which investment prevailed as the winner? Stocks—by a lot. The S&P 500 (the primary barometer for U.S. stocks) posted an annualized gain of 7.9 percent. If we extrapolated the same assets out until today, the figures would be even more impressive, and the gap between stocks and the other investment options would be even wider.
The classic phrase “all-time high” has been muttered by countless investors. Naturally, they view the market as a mountain, painstakingly climbing towards some summit before being forced back down by gravity’s pre-ordained pull. But compounding growth just simply doesn’t work that way. Compounding growth is, by design, a constant expansion into new territory. Sure, there are pullbacks, recessions, and downturns. Gut-wrenching volatility most certainly does occur. But except for short-term examples, growth itself generally represents an “all-time high.” The following visual shows the S&P 500 Index since year-end 1927 until today, which visually speaks to this point.4
When is the market NOT at an all-time high? Only during one of the visible short-lived downturns. If a company or market generates greater growth, or more efficient profitability, it’s most likely at an all-time high … again….and again…and again.
So, the question of whether or not to go through pain in the short term should not have any say in your long-term investment strategy. Could things be bad for a while? You bet. Might they turn out not as bad as everyone fears, and in fact maybe even be good? Could happen.
The bottom line is that your portfolio is built to achieve the necessary results over the long term. Your financial plan is designed to expand your comfort zone so you avoid making life-altering errors in the face of fear.
One of the greatest advantages the individual investor can possess—and the one least available from the 24-hour news cycle—is long-term perspective. As President Harry Truman said:
“The only thing new in the world is the history you do not know.”
We know for a fact that a correction is coming; we’re just not sure exactly when. But we should never try to alter our long-term portfolio strategy to try and “time” this. That is a recipe for disaster. Did you know the average annual correction since 1980 has been -14.3%?5 However, despite this volatility, the market’s full-year return has been positive in 31 of the last 41 years!6
Peter Lynch, a legendary stock picker, couldn’t have been more correct when he famously said,
“Far more money has been lost by investors preparing for the correction, or trying to anticipate corrections, than has been lost in the corrections themselves.”
You shouldn’t feel like a lesser person because you’re afraid; that’s normal. You’ll never catch us being frustrated with you because you have these feelings. If you need to talk, please pick up the phone and call. Just like Alex Honnold, we are here to help you systematically work at it until your comfort zone is expanded enough to get through the discomfort. Rest assured, dealing with this unavoidable discomfort is something we will tirelessly help you combat, because it is one of the more important traits of successful investors. Let’s remain optimistic about our futures and steadfast in our endeavors.
Thank you for reading!
Sourcing & Disclosures
1- American Film Institute – Feb 21st, 2019 interview
2- Free Solo the movie
3-First Trust Portfolios “Stocks Won” Source: Standard & Poor’s, Bloomberg, Federal Housing and Finance Agency (FHFA), Bureau of Labor Statistic (BLS), U.S. Treasury, New York Mercantile Exchange (NYM). Monthly data Sep ‘07 – Dec ’17, Housing data through Oct ‘17.Stocks represented by the S&P 500 Total Return Index. Gold represented by gold spot price per Troy ounce. 10-Year Treasury represented by the 10-year Treasury note constant maturity total return index. CPI represented by the BLS Consumer Price Index. Home prices represented by the FHFA Home Price Index. Cash represented by the 3-month Treasury bill constant maturity total return index. Oil prices represented by the NYM Generic 1st Crude Futures Index. This chart is for illustrative purposes only and not indicative of any actual investment. Past performance is no guarantee of future results.
4-sp-500-historical-chart-data-2021-02-04- Macrotrends.com Chart is shown in log scale so it’s more useful graphically.
5-JP Morgan Guide to the Markets page 18.
6- Nick Murray Interactive Volume 21, Issue 2, February 2021
The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S. Please note an investor cannot invest directly in an index.This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any funds or stocks in particular, nor should it be construed as a recommendation to purchase or sell a security. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. 3442569 dofu 02/21
Joel Malick currently maintains the Accredited Investment Fiduciary (AIF®) and Accredited Wealth Management Advisor (AWMA®) designations. Joel and his team at Steadfast Wealth Co. recognize that running this race for the long term is one of the greatest challenges you’ll face in your lifetime. Thus, they combine critical planning and investment strategies with real-life perspectives. Their consultation is provided at no additional cost to Alliance 403(b) Retirement Plan participants.