Taking Stock: Staying the course is still best option as markets wax and wane

Dear Mr. Berko: I’m 54, a self-employed engineer, married and have over $897,000 in my retirement plan that was worth $1,050,000 at the end of 2015. I’m scared of this market and my wife thinks I should sell and buy U.S. Treasury bonds.

Our broker of 12 years keeps telling us: “You have to do what you have to do” and is no help. We have been reading your column since we heard you speak in Gainesville, Fla., in 2009.

The market was bad then but your story about owning blue-chip type stocks plus the power of capitalism encouraged me to stay invested. And that was a good decision.

At 54, do you think it’s time to pull the plug and go to cash? The country was so much better off when I began working in 1984.

JG: Gainesville, Fla.

Dear JG: This is the type of market where caring, knowledgeable, wise and experienced brokers (they seem to be fewer in number) must counsel with their clients to stay the course. This is the type of market where knowledgeable, wise and experienced brokers should hold a client’s hands and caringly (if brokers can’t be caring, they should fake it) assure clients that the falling market is temporary and normal. And because I suspect your account owns quality equities with low betas, (including some oils) your dumb adviser should tell you two things: (1) stay the course and (2) that every downturn is temporary.

The stock market is not as predictable as the weather — though like the weather, it has its rhythms. As certain as winter follows fall, markets will decline. And as certain as spring follows winter, the markets will rise again. Since 1871, the market has fallen 10 percent about six times every 11 years. And like the seasons, you can depend on that. Still many investors become nervous Nellies and seriously want to liquidate. But markets come back every time, and every time the market comes back, it comes back higher. During that 145 years, the market has also fallen about 20 percent about every 48 months. You can depend on that, too.

While that’s as normal as the sunshine and the rain it still gives investors a serious cases of shivering fits. Those investors don’t have the good advisers, can’t manage their anxiety and move to cash. But the market comes back, and it comes back higher each time. And about once every decade the market declines over 30 percent and investors who can’t handle the heat have to leave the kitchen. But the market comes back higher — it has done so every time.

It’s easy to anthropomorphize the stock market as bullish, fickle, stubborn, raging, bearish, unresponsive or nervous. Business writers commonly ascribe these verbs (and others) to the market, giving it human traits. And because the stock market is a millisecond-by-
millisecond consensus of what millions and millions of buyers and sellers are thinking, it has developed its own, endogenously generated, circadian-like rhythm.

And Morgan Housel proved it. Housel, an analyst for the Motley Fool, reviewed stock market data going back to 1871 that covered a plethora of financial crises, national scandals, horrible recessions and two world wars. His research determined there’s an 80 percent degree of probability that every five years after 1871 you’d be worth more money because your portfolio will have a higher value. According to Housel, the S&P 500, every five years since 1871, adjusted for dividends and inflation, rose an average of 47 percent. But when the S&P falls 20 percent, the 5-year returns averaged 61 percent.

After a drop of 30 percent, the average return over the following 5 years was 78 percent. But after a 40 percent drop, the returns 5 years hence averaged 102 percent. And those numbers ain’t chopped liver.

Market drops never feel temporary but they always are.

Stay the course, but can that corpse of a broker who is dangerous to your financial health. And yes, the country seemed so much better off in 1984 but that was because you were single and a 22-year-old kid.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@yahoo.com.