As a financial planner, I've been asked countless times this year when the stock market will become more normal. When I answer, "It just did," people are perplexed. I explain that it was the past six years that were so abnormal, not the last six weeks.
Here's a perspective that may help you stay the course.
The U.S. stock market has been up every year from 2009 through 2015, though last year it barely eked out a gain. The total return of the Wilshire 5000 Total Market Index (the broadest measure of the U.S. stock market) was a whopping 166 percent, or 15 percent annually, during this seven-year period, making it the third longest bull market in U.S. history.
Further, though we have a perception that markets have been more volatile over the past few years, perceptions are often wrong. Robert Waid, managing director for Wilshire Analytics, ran the numbers for me, and each of the last four years has had lower than average daily volatility.
So the fact that stocks are down thus far this year, while market volatility has increased, shouldn't come as a shock, as it is actually a return to a more normal stock market.
Why we are surprised
Behavioral economists have defined a phenomenon called recency bias. This is where we base what we think the future will be on more memorable events of the recent past and tend to overweight the predictive value of those events. In short, we tend to draw a straight line from the recent past to forecast the future.
Much of the media seems to reinforce this bias. For example, late last year I examined an article declaring the death of the 60-to-40 percent stock-to-bond portfolio and wrote that high-dividend stocks were not a replacement for bonds. Going more heavily into stocks — dividend-paying or not — was merely a buy-high strategy. Many dividend stocks have gotten creamed this year because energy companies, which tend to pay high dividends, have been hurt by plunging oil prices.
Always remember that neither good times nor bad last forever. The stock market will never go up or down indefinitely, nor will volatility always be higher or lower than average. Getting used to the recent past and expecting it to continue is an all-too-human behavior that we should not allow to influence how we invest.
Take a longer-term perspective and don't expect the recent past to continue for much longer. It won't.
Allan Roth is the founder of Wealth Logic, an hourly-based financial planning firm in Colorado Springs, Colo. He has taught investing and finance at universities and written for Money magazine, the Wall Street Journal and others. His contributions aren't meant to convey specific investment advice.
Next ArticleRead This