Think of buying stocks as buying - tomato soup?
The S&P 500 stock market is approaching a milestone at 2,000. Twenty years ago, it was at 450. In 20 years, U.S. stocks have doubled not once but twice - this in spite of two massive stock market crashes that saw stock prices plummet 40-50 percent. In fact, if you were to examine any 20-year period of stock market returns over the past century, you might conclude that being a successful investor is a ridiculously easy endeavor.
Simply start with an initial investment - it doesn’t really matter too much when you start - and then add more every time the market goes down by 10 percent or so. After all, when stocks are down by 10 percent they are “on sale,” right? At the end of the past 20 years, you would have done pretty well. And I suspect using the same simple strategy will likely work equally well in the next 20 years.
But, let’s face it. Being an investor is hard work. It can be exhausting and stressful. Markets can seem to be out of control, particularly when there is a sale on. Over a 20-year period, you are likely to be scared witless more than once. And yet, over any 20-year period you care to explore, it turns out that the likelihood of a successful outcome is enormously high.
Why, then, do we get so worked up about market declines if they have always been temporary in nature? Why is it so hard to simply see the investment landscape with a calm, cool, detached and scientific viewpoint?
Because it is your hard-earned money that is at stake. And when the value of your investments is dropping, and the news is dire day in and day out, every fiber of your being is screaming at you to get out now. Get out before it’s all gone! Your prehistoric DNA provokes a fight-or-flight impulse. Calm and cool analysis seems imprudent when a dinosaur is about to eat you.
This emotional input is virtually impossible for most people to ignore, and it unfortunately, in my opinion, represents the single largest impediment to investment success. Too often the emotional response to short-term loss of investments simply overwhelms all rational thought.
Here’s a simple analogy that might help you navigate the next market storm:
Imagine your primary investment goal was to accumulate 1,000 cans of tomato soup over the next 10 years. How would you approach this goal?
Likely you would put money aside on a regular basis to buy cans of tomato soup. After all, you will need to buy about two cans a week. Some people might simply buy two cans a week and be blissfully ignorant of the cost, caring only that they would meet their objective in 10 years.
Others, in fact most, would start to pay very, very close attention to the price of tomato soup, and when it went on sale, what do you suppose they would do? Instead of just buying the two cans of soup, they would buy more!
And if there was a tomato blight that caused a temporary shortage of tomato soup and, therefore, the price was temporarily higher than average, what do you suppose our shopper would do? They would save their money until prices came back down.
Buying tomato soup is not an emotionally charged issue. It’s just business.
This is so simple a concept and yet so hard to apply to the art of investing. When the price of our investments falls, we want to sell them. And when the price is high, we want to buy more.
Try to remember this simple analogy next time the market suddenly drops along with the value of your investments. It does not mean the end of the world is near. It means investments are on sale, and you should probably buy more.
It has been quite some time since we experienced a market correction of any consequence. The last time there was a sale on stocks when prices declined by more than 10 percent was two years ago, in spring 2012. Using market history as a guide, we are likely due for a sale at any time. We should be prepared - both emotionally and with our investments.
Jonathan Lokken, financial advisor, is the managing principal of Lokken Investment Group LLC. For more information, call 302-645-6650 or go to lokkeninvest.com.