Don’t Listen to the Carnival Barkers

November 22, 2021 by Glenn Guard, CFA
Merry Go Round Horse West Financial Services

Financial news reporters on television can often come across like carnival barkers in an attempt to get and then keep your attention. But remember, their goal is ratings, not your financial well-being. What’s a great way to keep someone’s attention? Play on emotions of fear and greed. Focusing on daily fluctuations (a stock being up or down on any given day) is not the way one should be looking at investments in their portfolio. In fact, trading on a day-to-day basis (or intraday) is speculating, not investing.

When it comes to investing, having a short-term view can be detrimental. Having at least a 5-year, and preferably 10-year or longer time horizon, has long run benefits. Here's proof:

Reduction of Risk Over Time1

Chart: Reduction of Risk Over Time. Performance percentage in range of returns on left axis, time periods on horizontal axis. Time periods are 1-Year, 5-Year, and 20-Year for each of the following categories: Small Stocks, Large Stocks, Long-term government bonds, and Treasury bills. Small Stocks 1-Year range of returns is from -60 to 150%. Small Stocks 5-Year range of returns is from -29 to 45%. Small Stocks 20-Year range of returns is from 5 to 20%. Large Stocks 1-Year range of returns is from -45 to 50%. Large Stocks 5-Year range of returns is from 0 to 29%. Large Stocks 20-Year range of returns is from 3 to 18%. Long-term government bonds 1-Year range of returns is from -15 to 40%. Long-term government bonds 5-Year range of returns is from 0 to 20%. Long-term government bonds 20-Year range of returns is from 0.5 to 13%. Treasury bills 1-Year range of returns is from 0 to 15%. Treasury bills 5-Year range of returns is from 0 to 10%. Treasury bills 20-Year range of returns is from 0 to 8%. Compound Annual Return of Small Stocks is 11.9%. Compound Annual Return of Large Stocks is 10.3%. Compound Annual Return of Long-term government bonds is 5.7%. Compound Annual Return of Treasury bills is 3.3%. Source: Financial Fitness Group

On the left axis is performance, on the bottom axis are different time periods. The bars represent the range of returns. Let’s look at small caps: On the very left one can see that the volatility of one-year returns for small cap stocks is quite large. In some years, small cap stocks have doubled in value, and in some years small caps have been cut in half. Now look at the 20-year time period for small caps (third dark blue bar from left). The range is much smaller, indicating significantly less volatility. This has been the case for all of the asset classes – small caps, large caps, government bonds and T-bills.

Now take a look at the Compound Annual Return box in that same chart. Over the very long-term (1926-2020) small caps have enjoyed an average annual return of 11.9%, large caps 10.3%, and so on. What the data suggests is that it pays to stay in the market and not make too many short-term trading bets.

Let’s look at more recent history:

Chart: S&P 500 Total Return (Price + Dividends). Total return on the left axis and dates on the horizontal axis. Dates start at 10/1/2018 and go quarterly through 7/1/2021. Total return range is from 4000 to 10000. 10/1/2018 total return is 5763. 1/1/2019 total return is 4984. 4/1/2019 total return is 5664. 7/1/2019 total return is 5908. 10/1/2019 total return is 6009. 1/1/2020 total return is 6554. 4/1/2020 total return is 5269. 7/1/2020 total return is 6352. 10/1/2020 total return is 6919. 1/1/2021 total return is 7760. 4/1/2021 total return is 8238. 7/1/2021 total return is 8943. Source: S&PGlobal

The above chart shows the performance of the S&P 500 over the last three years. Observe how quickly the stock market fully recovered from the initial coronavirus news. In the middle of a global pandemic, with businesses shuttered and millions of employees out of work, the stock market’s performance has been exceptional. One can easily see how poorly a panic seller in the first quarter of 2020 would have fared.

Here’s another way of looking at it. Take retirement assets. These funds are supposed to last for the rest of your life, and perhaps longer if your spouse outlives you. Unless you are withdrawing large sums early in retirement, during a down market, you should not be so concerned if your portfolio is up or down any given day, week, month or even year.

If you find yourself getting emotional about market swings, reach out to your relationship manager or other financial advisor. A professional should be able to be more objective about market conditions, and should know enough about your personal goals to be able to suggest any necessary changes to your investment strategy that will help you sleep better.

And remember that television personalities, much like carnival barkers, are selling you something in their short-term market analyses. Don’t listen to the carnival barkers. Hire a financial advisor who can see past the short-term market noise and is invested in helping you attain your goals.

If you have questions or would like to discuss the specifics of your situation, please contact your relationship manager or a member of our financial planning team.

Meet Glenn Guard, CFA »

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2Source: S&P Global

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