That is a question we often hear from prospective clients. The answer is, yes — and no.
There is always uncertainty, and the markets could plummet tomorrow. Even though we follow markets closely and read endlessly, we can’t predict the future.
So, let’s look at the market right now. There are lots of reasons we could say, avoid it:
• We’ve been on a near record bull run. It has to end soon, right? Indeed, this is the third-longest bull run since 1900. (The longest was from 1921–29.) The average bull market lasts about 43 months, and we are now in month 90.
• Market valuations, as measured by price-to-earnings ratios (P/E), are at relatively high levels — 16.9 times earnings. By comparison, the historical average is about 15.9. So, it’s high, but not crazy high.
• Interest rates are likely to be rising in the near term. That creates uncertainty, and markets hate uncertainty.
• Our president-elect is an untested and unknown leader who has threatened to upend many of the established political practices and diplomatic norms. We just do not know where it will all lead to.
• Terrorism seems to be bubbling up everywhere, and the Middle East is in a state of upheaval and misery. Who knows where this is going to lead? There is also concern about relations with China and North Korea.
• And then, to quote Donald Rumsfeld, there are the “unknown unknowns.” Those are the truly frightening “black swan” events that catch the world by surprise. Think 9/11 or the credit debacle that led to the Great Recession.
Despite the reality of constant uncertainty, we have to balance that with the fact that still there are lots of good news — corporate earnings are strong, unemployment is down, real wages are up, inflation is low, etc.
KNOW WHY YOU’RE INVESTING
Let’s re-frame this discussion a bit: What is it you are investing for? A quick financial pop? A year in and then out? Indeed, most investors look at one-year returns. We are creatures of the calendar.
And if measured by that simple approach, then things can look volatile: since 1926 we’ve had seven years with calendar year losses of 12 percent or more. Three of those years saw losses of greater than 35 percent. From July 1932 through June 1933, the market declined by nearly 70 percent!
But, how many of us are investing just for one year? Most of us invest for retirement — the long term, 20 or more years. Well, it turns out the longer you look at your investing horizon, the smoother things get. Or to put it another way, the longer you hold on, the more likely you are to not experience a loss.
For example, if you invested your money in the S&P 500 over any 20-year period since 1926 through to the end of 2015 — we call these rolling period returns — you would never have experienced a negative return. Yet, those 20-year periods included the Great Depression, World War II, Korean War, Vietnam War, stagflation, Watergate, the dot-com bust, 9/11 and the Great Recession.
Over this period, the market went up 75 percent of the time. Fourteen of those years saw returns greater than 35 percent. The average return for the S&P 500 over this period was 10 percent. During that ride, we experienced pockets of stomach churning volatility, but markets recover and move on. That is the silver lining to every economic down cycle.
David B. Lawrence, CFP, is a certified financial planner and investment adviser with Willow Creek Wealth Management, Inc. in Sebastopol, one of the leading wealth-management firms in California. Willow Creek Wealth Management has served North Bay clients since 1984 and has been ranked one of the top 300 fee-only financial-planning firms in the United States. For more information, visit www.willowcreekwealth.com or call 707-829-1146. Wealth Matters is a monthly column (see past columns) from the firm’s advisers.