How Are We Feeling Today?

Long-term investment returns, that's what we're after. Winning 9% a year for the next 20 years will get a lot of people across the finish line, whatever that line is. That's what the S&P 500 has done for the past 20 years. Some old-timer likely started even earlier, say in 1957 and made 12% on average per year. That's what the S&P 500 has done since Standard & Poor's birthed the index that year.

9% a year sounds great. Most investors say they feel fine with a 9% return per year. This was Bernie Madoff's move: I give you 9% per year, every year like clockwork, don’t ask too many questions.

And expecting 9% returns a year in the long-term is reasonable (past performance may not be indicative of future results), that doesn't mean its free. The writer, Morgan Housel, makes this point: "Market returns are never free and never will be… the volatility/uncertainty fee - the price of returns - is the cost of admission to get returns greater than low-fee parks like cash and bonds." Getting to the long-term means brushing off those times and avoiding the fits, tantrums and other bad behavior that takes you off that road.

Ok, so I should expect some swings. No problem, right?

It doesn't feel that way. No one lives in the long-term and the market is rarely at the average. Even when it is at the average, its probably headed higher or lower soon. The market, very famously, is always getting caught up in its feelings.

How you feel as an investor depends a lot more on what's going on today. The market is a wild place and right now, the market is probably down. This is true in a particular sense on May 9, 2023 and in a general sense on any other date in the past or future. It is true almost all the time. The market is more than 1% off from its peak four out of every five days. A 1% dip shouldn't bother anyone too much, but the market spends most of the time even farther from its peak.

Different people have different mettle for what sends them into a tailspin. And, yeah, there are other factors besides just looking at the ticker, like, say not getting enough sleep or the neighbor playing their music too loud. But, let say you're a hardened investor and only start to get annoyed by price declines when they plumb past 30%. Well, the index has only been down from its previous high that much about 8% of the time during (almost) my lifetime (since 1984).

OK, you say, that's not so bad. I really just have to talk myself out of throwing a tantrum and making emotional decisions 8% of the time. 92% of the time. I can do that!

8% is still just averaging one day every two weeks that the market tests your stuff. Most of us could squeeze in some exercise once every two weeks if that's all it took to stay in peak physical health. Surely, we could endure a rough day every two weeks for our financial health. But those periods when the index is down don't happen "on average." They clump together, like trash floating in the sea. They drag on for months and months, sometimes years without regaining the prior peak.

Now maybe you, or "your friend," rather, are a bit hot headed sometimes and a 10% drop throws you (ahem, "your friend") for a loop and causes you to reconsider all your major life decisions. You're now spending more than two days every week, on average, but sometimes years at a time, stressing. Most years see a drop of at least 10% from peak to trough.

Whatever your threshold, stressing over market drops is a sorry state for making long-term decisions.

So what's the move? You could rearrange the market so that you don't have to suffer these tough episodes. And, to a certain extent, this is what the private equity industry is selling: hilariously and harshly dubbed "volatility laundering."

If that option isn't available you can, and LCM recommends this, shift your expectations. Odds are that you'll be down from your peak a significant portion of your investing life. Anticipate this. It shouldn't be a surprise when it happens. And use it to your advantage by being flexible and nimble. If you're feeling glum about returns others probably are too. Maybe they're making poor, emotional investment decisions. These are often times when the best investments are made.

Long-term returns aren't free. The biggest cost is psychological - how much you feel the downturns. You (probably) can't change the fact that you'll be down from your peak a lot. You can change how you feel about it and how you go after new investments when those opportunities arise. Make market tantrums a feature of your investing process rather than a tormentor.