Welcome to the world of investing … markets don’t always go up (and they don’t always go down either).
Many people miss the purpose of investing. It is easy to get frustrated when the goal is only to make money. How do you measure success under that goal when the goal posts keep getting moved (greed keeps getting more greedy).
Here’s the S&P 500 chart (the DOW* is more familiar, however I’ll use S&P here since I’ll refer to the VIX later which is based on the S&P). You can click on the 1y link on the S&P500 chart to see what it has done over one year. As of the 1 year period between 1 July 2011 it started at 1339.67 and ended 29 June 2012 at 1362.16 for a difference of 22.49 points between beginning and end. The peak was 1419.04 on 2 April 2012, and the valley was 1099.23 on 3 October 2011 for a difference of 319.81 points variation in the S&P over that same year. Lot’s of ups and downs (319.81 points) compared to the progress made (22.49 points) … 14.22 points of volatility per each 1 point gain. Sometimes the year ends down too!
The related VIX chart, often refered to as the fear index, shows how much fear was present at the time (the larger the number, the more worries there was … point of reference: VIX peaked at high of 79.13 on Oct 20th, 2008).**
But … I suggest to you that this is not how you measure progress towards your goal. This only measures progress of the market. People get these two mixed up and make some real mistakes with their money as a result.
Riding the S&P500 roller coaster did change the value of your portfolio if it was 100% in the S&P500. A lot day by day, but much less if you look at things over the year. Here’s the emotion … emotion reacts to the ups and downs.
Have you noticed the same happens on roller coasters? You feel the most emotion at the top and bottoms of the roller coaster with some other emotions thrown in at loops and bends in the coaster’s ride. Yet … you end up at the same place you start on roller coasters.
Very deep market declines are often followed by recovery. Very high market peaks are often followed by some sort of correction. So what is the surprise when this happens? The highs and lows of your portfolio may be mitigated by adding an asset class that doesn’t go as high or low as the rest of the portfolio. This is part of prudent investment planning.
Moral of the story: Just like the size of the roller coaster you get on, you can determine the size of the roller coaster of your portfolio. This doesn’t prevent loss of value, which if prevention of loss is your goal, also tends to prevent growth. Once you realize this, you may be a bit more liberated from emotion and fear and focus on living life and how your resources may aid you with that end in mind. This is part of prudent retirement planning.
Investment planning and retirement planning are two totally separate things, however they are connected by your emotions … and being truthful about emotions sets the stage to establish a realistic portfolio which sets the stage for realistic retirement planning. Jumping on and off a roller coaster is dangerous to your health. Jumping in and out of the markets is dangerous to your wealth.
And the real Moral of the story? What does what the market has done got to do with what you are trying to do with your money? That is much like deciding things based on what the markets did back in 2004 (do you even remember what markets did back then?) ! In other words, what the markets did in any given year doesn’t tell you much about your progress … it just tells you about the markets progress. Don’t get the two confused.
What is it you should be trying to do with your money? That answer is here in this blog … Moving your Goal Posts.
*DOW peak, during the 1 year time period above, was 13279.32 on 1 May 2012 and the low was 10655.30 on 3 October 2011; a difference of 2624.02 points. The Dow was 12,582.77 on 1 July 2011 and closed 12,880.09 on 29 June 2012, a gain of 297.32 points over the year (of course some years end down too). That is 8.82 points of volatility per each 1 point gained.
**More on VIX here. Note also that I do not suggest the VIX is predictive (nothing is predictive) … it is simply a measurement just like the temperature outside today is a measure of today’s temperature, not tomorrows. Mixing in other asset classes, especially through indexed funds, besides the S&P500 provides more diversification.