The Stock Market Is Not Crashing
Despite what recent news headlines would have you believe, the pillars of our financial world are not crumbling, the world as we know it isn't ending, the stock market isn't crashing to zero.
This is far from the first time that the media has exaggerated something in order to grab attention, and it certainly won't be the last. It all started a little over a week ago, when the S&P 500 opened the week nearly 4% down from its previous close. The market rallied throughout the day, ending just shy of 3% down.
Although that is a large drop, it's not unheard of. We only have to travel back in time to March 2020 for a much worse day, when the S&P dropped about 12%. During that period of time, we saw a 34% decline in a little over a month. Which historically was one of the sharpest and most dramatic declines. Since then, the S&P is up about 135%.
The media's job isn't to teach or inform, it's to sell. And unfortunately for us, our biology is wired in a way that makes bad news more captivating than good news. Bad news sells, so that's what we're shown. A headline that's intended to amplify the bad news, can be really powerful when you don't have a frame of reference.
Stress and anxiety set in when you don't know what you should expect. The market dropping 3% in a day can seem like a lot, or maybe it doesn't, it just depends on you. But what we've seen from markets really isn't anything out of the ordinary.
"Popularizers often get mistaken for experts. Keep that in mind when you're in the market for an expert: the person with the real expertise is often not the person who made the subject popular." – Shane Parrish, Clear Thinking
Key Takeaways:
Drawdowns are a completely normal part of investing, if someone freaks out about the markets moving down, I'd question their investing knowledge.
Often the worst thing we can do is deviate from our plan, time is your best friend when it comes to investing, stick to your plan and stay invested.
Having a better idea of how the world works will let us have a better idea of what to expect, giving us the opportunity to plan for it and avoid surprises.
When I first started learning about investing, my eyes were glued to charts all day long. Watching a line update every 15 seconds across my computer screen felt like watching the latest box office film. Luckily, I've learned a lot since then.
If you're a long-term investor, you know that day to day, week to week, and month to month market movements don't matter. Your timeline of what matters is stretched across years and decades. Focusing on anything short of that, is just a waste of time. It's like evaluating your level of happiness over a year by a single interaction. It makes no sense.
Now, I honestly only look at charts when I'm prepping for annual reviews with clients, or when I'm pulling information to use for articles. The more I learn about investing, the less I check on or care about what's happening on a daily basis. I wasn't aware of Monday's big drop until someone asked me what was going. I knew that markets were trending downward over the previous couple of weeks, but that was the extent of my knowledge really.
Drawdowns happen... a lot more than you think
When we don't know what we should expect, anything could surprise us. When we look back historically, about 2/3 years have a drawdown of at least 10%. A drawdown of at least 10% is more normal than not within a calendar year.
With all of this commotion, it might surprise you to hear that in 2024, we haven't had a drawdown of 10% or more. To this point, 2024 is in the 1/3 of years without a drawdown of 10% or more. Making it, in that regard, a historically good year.
S&P 500 Annual Returns vs Intra Year Drawdown
We can also see that despite all of the drawdowns, we still have far more positive annual returns (36/44) than negative annual returns (8/44). The truth is that markets don't appreciate in value at a constant pace. They naturally move in waves, with periods of growth and periods of contraction. But that's normal, it always has and it always will.
When the media begins to freakout about markets declining, it makes you wonder what they thought would happen – how well do they know what's supposed to happen? What's the completely normal thing they'll freakout about next?
Stay invested, time is your best friend
If you're worried about the impact a drawdown will have on your investments, chances are you're not invested appropriately. If your timeline is short enough that a drawdown jeopardizes your chance of achieving a goal, it's time to reevaluate your strategy.
We know that the shorter the period of time, the greater the range of outcomes are. But the longer we invest for, the better (more positive) and more certain (less range) our outcomes become.
S&P 500 Annualized Total Returns
Markets move up, and markets move down, which is natural and normal. But over a long period of time, markets move up. Short-term trends get erased by the test of time, to the point that they are hardly distinguishable on charts.
By knowing what to expect, it's easier to block out the noise of people who are playing a different game. The media isn't trying to give you advice, they are trying to make sales. Of course they want to catch your attention with a headline, but it honestly shouldn't make any difference to you. Because it won't make any difference over the life of your investments.
How the world works > how you want it to work
When you understand how the world has always worked, and is likely to continue to work in the future, you have a better baseline to reference events to. If you only want markets to go up, if you want to see your investments appreciating each and every day, you're going to live a stressful life.
But if you understand that markets fluctuate over the short-term, but appreciate in a mind-blowing way over the long-term, then what you experience should always be normal. Bad days, drawdowns, periods of declines, corrections, crashes, recessions, they are all normal. It's like anything else. Something good, always comes with a little bit of bad. The good news here, is that the bad is not only tolerable, but it's what makes the big rewards.
At the time of this article, the S&P 500 is up over 14.5% year to date. If you asked me at the beginning of the year if I would have taken a 14.5% return by now, I would've said yes without hesitation. That's a return above historical averages, and a return without a 10% or more decline, making one of the least volatile years ever.
Now, that all could change, but even if it does, does it even matter? I think by now you know my answer, absolutely not. If the market does decline significantly (which eventually it will), it will recover (as it always has). We know that it will, it's not a question of if, but a question of when. By knowing and understanding that, you won't be taken by surprise.
Markets are made up of the companies we work at, the products we buy, and the services we use. A world where markets go down and stay down to never recover, would be a world best described as the Wasteland from Fallout. At that point, we'd all have much bigger things to worry about. But until that apocalypse, I'll be investing the same as ever.
Keep doing things your future self will thank you for.
