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Dow One Million

bear and bull figures in front of the $100 bill

Successful long-term investing has always been about being prepared both financially and psychologically for the inevitable periods of decline.  We all know that corrections and bear markets are normal, and to be expected, but why do we see an uptick in anxiousness during periods of decline? (we forget it is temporary and that we are prepared for it)

I believe this is because we are simply human.  In the book “Predictably Irrational: The Hidden Forces That Shape our Decisions” we learn a lot about what it means to be human, to be fallible.  Although we think it is reason and logic that rules our behavior we can see many examples that what we do on a daily basis is often anything but logical.  I believe that this is the case with investing.  Left to our own devices we are tempted to do the wrong thing, at the wrong time, for the wrong reasons.

At the time of this writing the equity markets have declined into correction territory for the second time in 2018.  The first correction started on January 26 and ended on February 8, lasting only 13 days.  How long will the current correction last?  Good question.  Will the current correction extend into a bear market, or a period when equities decline in the short-term 20% or more?  Nobody knows the answer to this question, but I would like to offer some advice, that I believe will be helpful whether the next 10,000 points in the Dow Jones Industrial Average is up, or down.

Last fall Warren Buffett predicted that the Dow Jones Industrial Average would rise to a level of 1,000,000 over the next 100 years.  I don’t know if you saw this, but I believe that anyone who read about this probably did a double take and potentially dismissed it outright as impossible.

After reading one of many articles regarding this prediction, I found that in the last 100 years the Dow increased from a level of 81 a century ago to about 22,000 at the time of his prediction.  The average annualized return of the Dow over this time segment was something in the neighborhood of 5.8% a year.  However, if you include dividends the Dow actually produced a return of about 10% a year.

Knowing this was Warren Buffett being bold or unduly bullish in his prediction?  According to Antoine Gara, a staff writer with Forbes, the price level of the Dow would need to compound at less than 4% annually to reach 1,000,000 in the next 100 years.  It would reach 2,000,000 if the Dow gains 4.6% annually and would increase to 10,000,000 if it rose 6.4% a year.

My conclusion is that Warren Buffett was not being bold at all.  My guess is that he was simply trying to get people to think longer-term and to remember that if you are prepared financially and emotionally for inevitable periods of short-term declines, that investors who give their portfolios enough time, money and patience will be happy they did in the long-term.

I never tire of the commentary that Peter Lynch wrote for Fidelity Investments following the terrorist attacks of 9/11.  I have a copy of this in my “bear markets” folder and probably read it once a year.  If you do not have this in your personal bear markets folder I encourage you to Google “Peter Lynch Commentary 2001” and save yourself a copy before the day comes when it is no longer on the net.  It is my strong opinion that this should serve as a template for every conversation we have with our clients for every bear market to come.

My favorite portion of this commentary is the last section titled “What should we do over the next few days and week?”  In this section he talks about how to handle short-term money vs. long-term money.  He defines long-term as not three weeks from Wednesday, but a minimum of 5, 10 or 20 years.  He addresses the impossibility of market timing and then he ends with his own prediction.  At the time he wrote this commentary the Dow Jones Industrial Average was a little over 8,000.  Here is what he said.

“As I said earlier, which way the next 1,000 to 2,000 points in the market will go is anybody’s guess, but I believe strongly that the next 10,000, 20,000, and 40,000 points will be up.”

Was this a bold prediction by Peter Lynch?  I don’t believe so.  At a level of 8,000 it would be impossible for the next 10,000, 20,000 and 40,000 points in the Dow to be down.  His statement acknowledges that what will happen in the short-term is anybody’s guess, up or down, but that investors who give their portfolios enough time, money and patience are better served taking the long-view than trying to predict the short-term.

Today the Dow around 25,000.  Which way the next 5,000 or 10,000 points in the market will go is anybody’s guess, but I believe strongly that the next 25,000, 50,000 and 100,000 points will be up.

It is my hope that you will consider both Warren Buffett and Peter Lynch’s comments as you wind down the year and prepare for 2019 and beyond.  What our clients need most from us during inevitable periods of unpleasantness is reassurance.  Provided they have adequate insurance, have not invested money they need in the short term to pay for college bills or the next few years of retirement in the stock market, they have time on their side.

Let’s remind them of how prepared they are with the emergency reserves we helped them to establish.  Let’s remind them that their insurance program is up to date and protects them from real risk and that no matter what the direction of the financial markets in the near-term that their portfolio, which we properly constructed according to their goals and their time horizons, given enough time, money and patience, will support the plans they have entrusted us with.

Corrections and bear markets, although normal and to be expected, are rarely easy for investors.  At times like these it is important to increase our efforts to stay in contact with our clients.  Make it a point to set aside time on your calendar to do nothing more than reach out to clients and let them know you are thinking about them and available for them to answer any questions they might have.  We don’t what is going to happen next, nobody does, but we can reassure them that they have have seen things like this before and that they are prepared financially.

Difficult markets are always opportunities for great financial advisors.  Be sure you make time to reach out and simply check in.  Your clients will appreciate hearing from you.

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