Q. With tariffs in flux, a new tax bill in Congress, and a host of other changes, I have concerns. What is the worst case for stocks? — Dave in Suntree
A. Dave, there is plenty to be concerned about, but the market doesn’t care what you, me or any individual thinks about stock prices. No one knows the answer to that question.
Don’t get me wrong. There are plenty of people who will give you a number and do so with confidence and logical narratives. Some will say the 20% decline U.S. stocks experienced in April is as bad as it will get while others will say that was just the first pothole on a treacherous road ahead. You will find no trouble finding someone to tell you what you are inclined to hear. This is not at all unique. It is the normal state of affairs. The abundance of opinions is what makes markets work.
Those who think current events will cause stocks to drop can sell to those who think they’ll rise. If you want to take sides and place a bet, feel free but the very volatility that people fear is what makes trying to time the market so dangerous. When you are wrong it’s costly. When you are right, you’ll probably want to do it again and with more money.
The S&P 500 index, a widely followed measure of the prices of the stock of predominantly large, well-known U.S.-based companies has dropped more than 10% at some point in nearly 40% of the calendar years since its establishment in 1926. Since 1950, the worst 1-year return for the S&P 500 was -37%. In my lifetime, there have been three declines of roughly 50%, 1973-1974, 2000-2002, and 2007-2008. That represents plenty of opportunities to produce outsized results from timing yet, so few pull it off with enough accuracy to excel over time.
Fortunately, you shouldn’t need an accurate prediction about a current event-driven worst-case scenario to succeed with your investments. Instead, you can choose to hold diversified stocks for goals you won’t reach for several years. When, not if, stocks drop, you hold or buy a little more and always remembering that volatility is the norm. Volatility should be expected, not feared.
The longer the time frame the better. The chances of making money in the market go up dramatically when you stay committed for the long term even when things look or feel awful — and they WILL look and feel awful when the market is down.
Pick a day at random since 1950 and the chances that the S&P Index went up over the next 12 months is roughly 79%. There is no period 6 years or longer with a win rate under 97% and all the periods of 12 years or longer produced positive returns. The stocks for the long-term approach has worked well because growth, in the aggregate, is also the nature of stocks.
When times are tough corporations adapt to the new circumstances. Just because times are tough or uncertain doesn’t diminish their profit motive. Some succeed at making changes, others fail, but no matter what was thrown at the economy, stock prices, in the aggregate, have always recovered.
I’ve been managing client assets for 34 years and the only people I have ever heard of that had catastrophic experiences did so because they exposed their personal financial standing to worst-case scenarios that were far worse than what a diversified portfolio has ever produced.
I’ll outline some of those mistakes in my next column.
Dan Moisand, CFP has been featured as one of America’s top independent fee-only financial planners by at least 10 financial planning publications and practices at one of America’s most decorated independent firms. For more info, e-mail him dan@moisandfitzgerald.com, visit moisandfitzgerald.com or call Dan at 3210253-5400, Ext. 101.
This article originally appeared on Florida Today: Give it to me straight: What’s the worst-case scenario for stocks right now? | Dan Moisand
Reporting by Dan Moisand / Florida Today
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