Dave Sather’s Money Matters: Losing your lunch and investments
Oct. 4, 2011 at 5:04 a.m.
By Dave Sather
On a recent flight out of Victoria Regional Airport, we were airborne just a few moments when a pocket of turbulence shook the little puddle jumper. Prior to that interruption, I had been absorbed in recapping the day to Carol, complaining that the irrational stock market had another big swing.
As the plane surged up and then lunged down, I reached for the barf bag in front of me. Carol's eyes got big as she wondered if I was going to get sick. She was trapped next to me with nowhere to hide.
I quickly reassured her that I was fine - I was just wondering if all stock market accounts shouldn't come equipped with a barf bag and some anti-acids, also.
Certainly the past quarter has given us quite a ride. The Dow moved by more than 200 points 18 times and during one stretch in August it set a record by swinging more than 400 points on four consecutive days. And, of course, there was 24/7 media coverage of every blip along the way.
However, should any of us be surprised? We counsel our clients that the stock market is a very volatile ride.
In fact, since 1980 the market's quarterly returns have dropped by more than 10 percent on eleven different occasions - about once every three years. Furthermore, the volatility experienced in 2008/2009 should still be fresh upon our memories.
Despite these high volatility occurrences, the stock market still averages about 10 percent per year - but never in a straight line. So what should you expect?
Since 1927, the stock market has lost as much as 44 percent in one year. Conversely, it has gained more than 50 percent in one year. At the extreme, this is what you should anticipate from any 12-month period. Understandably, we have many people tell us they can handle this, but it is often a very different matter when you see your hard earned dollars withering away.
Knowing what a volatile beast the stock market can be, we always try to focus on our long term (10 plus year) objectives.
Ten years is not just a convenient number we picked out of the air. Rather, it has statistical significance. Since 1900, the worst 10-year rolling average was - 1.3 percent per year achieved between 1928 and 1937 (if you were so unlucky to buy at the peak before the 1929 stock market crash).
Conversely, the best 10-year rolling average has been more than 18 percent per year achieved during three different time frames. Obviously, time is your friend if you are going to be a stock market investor.
If we are long-term investors, this does not mean that we will just buy something and forget about it. Obviously, the underlying businesses still have to perform. Additionally, with interest rates so low it is quite frequent that we see our clients living off of the dividends that their portfolios produce. As such, they spend the dividend while leaving their stock ownership intact.
Given the numerous issues that the world and our financial markets face, we doubt the volatility is behind us. This gives investors even more reason to scrutinize what their time frames are and why they have their assets positioned as they do.
Now it is time to head to the store and stock up on some more Rolaids - I am sure the week will be interesting.
Dave Sather is a Victoria Certified Financial Planner and owner of Sather Financial Group. His column, Money Matters, publishes every other week.