I despise market commentary, both for the presumption that anyone really knows the reason for short-term movements and because it distracts people from the fact that investing in equities is a matter of long-term ownership in the businesses that provide the world’s goods and services. Fluctuations in human emotions explain more of the short-term movement in stock prices than do changes in the fundamental value of the businesses.
Nonetheless, the market panic that opened 2016 deserves mention here, not because I predicted it (I certainly did not) nor because I know when it will end (I certainly do not). Now is a great time to remind people why equities, over the long haul, have trounced bonds and bank accounts as investments: few people would put up with the volatility of equities if they didn’t expect a better return. Or as Nick Murray so beautifully puts it: “The ride is the reason for the return.”
If we look at historical studies demonstrating that stocks have traditionally earned 2 to 3 times the return of bonds and cash after inflation, we might wonder why anyone would keep less than 100% of his long-term wealth in equities. In fact, bonds and cash have actually suffered losses, after inflation, of 50% or more in bear markets lasting decades. Sure, we could go for TIPS (treasury-inflation-protected securities), which are better protected from inflation (but not from inflation AND taxes in taxable accounts), but they were offering 0.34% to 1.29% at the close of January 20, 2016, with no meaningful gain potential from drops in inflation and interest rates. Anyone thinking about living off TIPS investments had better be mighty rich for those percentages to sustain them.
Stockholders are owners of businesses, and owners get paid last, after employees, contractors, suppliers, and creditors. So changes in available revenue affect owners first, and that is the source of a great deal of uncertainty and occasional outright panic. Point granted: stocks are much more volatile than bonds and cash, and employees have a much more predictable flow of wages than their bosses do of dividends and capital gains.
Yet since owners are paid last, in the long run they can be expected to be paid most — not always and certainly not in all companies, but for someone who owns a globally diversified portfolio of the world’s productive businesses, it’s a pretty good guess. My purpose in life is to tell my clients this as often as necessary.
So might I suggest that you remind yourself, during scary times like these, why you’re invested in stocks? You’re providing the service of accepting the short-term uncertainty that others want to avoid. You’re the rock, the stable source of capital for businesses, without which market economies cannot function. Be a rock and react like a rock to the non-news that human nature goes through periodic bouts of extreme fear.
My favorite definition of a bear market is “that period of time during which stocks are returned to their rightful owners.” I have no idea when the market will bottom or if it has already bottomed. But somebody has to own stocks when they’re going down, and I figure it might as well be me if I want the rewards when they are going up.