As you probably saw last week, global stock markets dropped sharply in value. There are a number of factors contributing to these recent declines including expectations of higher interest rates, falling oil prices and an economic slowdown in China.
As our focus is on the long-term, we welcome periods of sharp market declines as falling prices often produce for our clients buying opportunities with less risk. Also, periods of sharp market declines are historically normal and to be expected when investing in the stock market.
During turbulent times in the financial markets, it is often human nature to lose site of the long-term view and focus instead on today’s headlines. This short-term focus will often create fear and panic, which can then fuel the temptation to sell. If history is any guide, looking past the headlines and staying focused on the fundamentals can produce the best long-term results. According to Morningstar, $1 invested in stocks in 1926 would have been worth before taxes $5,317 by the end of 2014. This incredible growth in value is testament to the long-term durability of our economy, especially when you consider the fact that our nation has endured many challenges since 1926 including a depression, multiple wars, a major terrorist attack and numerous recessions.
While investing always involves the risk of loss, the future is always uncertain and no one blows a whistle at the bottom (or the top) of the market, we believe the best results are reserved for those who maintain a long-term investment approach. A long-term approach requires basing investment decisions on fundamental valuations (e.g. is this business a good value?) while resisting the temptation to time the market. (Please note that timing the market involves trying to hop in and out of the market based on short-term expectations about where the market is heading.)
The odds are greatly stacked against investors with a market timing approach. If, for example, an investor was out of the market during the 45 best months from 1926 through 2014, a $1 investment would have only grown to $20.05 compared to $5,317. The staggering difference in returns reminds us of how risky it is to try to time the market. Of course, it is always tempting to think that “this time is different”, but consider the fact that $1 invested in the market in 1995 would have grown in value before-taxes to $6.55 by the end of 2014. If, however, the investor missed the best 18 months since 1995, this $1 investment would have only grown to $1.62, less than what would have been made with Treasury bills which was $1.69.
As markets are always unpredictable, we are reminded during difficult market periods of how important it is to maintain the long-term view and the importance of maintaining a disciplined investment strategy. In summary, we believe lower prices produce greater investment opportunities with less risk; the best results are reserved for those who maintain a long-term focus; and lastly, we cannot over-emphasize enough the importance of resisting the temptation to make financial decisions based on emotions rather than a rational approach. This advice is especially important during periods of falling prices which is often when emotions like fear are the strongest.
If you would like to learn more about our long-term investment approach, simply give us a call at 713-850-8900. We would be happy to answer any of your questions and address any of your financial concerns.