The price we pay for long-term gains


As I write this, stock markets have been in freefall for several days.

Pundits who couldn't talk over each other fast enough to justify ever-increasing prices are now clogging the airwaves to say what justifies the selling.

I've heard the falls pinned on:

  • Rising US government bond yields
  • The new Federal Reserve chairman
  • An imminent end to quantitative easing in Europe
  • Tentative signs of higher inflation
  • Over-bought conditions after the strong gains
  • Over-selling from computer algorithms after the downturn began
  • The spat between President Trump and the FBI
  • The US tax cuts, and their impact on US national debt
  • The kitchen sink

Never mind everyone was near-euphoric two weeks ago - that rising yields were said to reflect the bond market giving its blessing to the global economic recovery, and that Trump was being credited for reviving animal spirits.

Stock markets are now falling, and Something Must Be Blamed.

Jarring reality

"Welcome to the suck" is the phrase that pops into my head whenever I see prices plunging, and the old familiar market bears tell us that the cataclysm they've been predicting for a decade is finally at hand.

It may seem an idiosyncratic phrase for a financial analyst to turn to. Indeed, it entered my consciousness not from CNBC, but via a trailer for the 2005 army drama Jarhead.

In it, we watched US marine recruit Jake Gyllenhaal endure a variety of miserable basic training experiences, before shipping out to the Gulf to endure deadlier miserable experiences on the front line (if I recall correctly).

But it's that refrain that stuck in my mind:

"Welcome to the suck."

It seems this stoic utterance has long been muttered between US marines to acknowledge the harsh reality of the life they signed up for as bright-eyed recruits.

But I find myself wanting to ruffle the heads of new investors disturbed by their plunging portfolios and confused by the explanations they're being given.

Chin up! Welcome to the suck.

Simply sliding

It might seem a glib way for a Motley Fool writer to reflect on a sell-off in shares.

Shouldn't I be giving you some complex explanation for the falls? Wouldn't it be better if I reassured you all that in ten years you will look back at this rout as a blip?

Well, yes and no - or more precisely, no and yes.

Firstly, no, I don't have a complex explanation for the falls.

My best guess is shares went up a lot, every week, for well over a year, especially outside of the UK, and it's natural to see at least a pause.

Share prices can't go up forever. Prices would become detached from all fundamentals, and we'd enter the realms of tulip mania (or should that be 2017-era Bitcoin mania?)

Markets climb a wall of worry, but periodically they take a bungee jump downwards. This has been going on for hundreds of years. It just happened again.

Sure, some reason will emerge over the next few days to 'explain' why shares sold off right now. I suspect something convincing sounding to do with risk-parity funds that try to hold bonds and shares in an optimum allocation - and I could wax lyrical about that.

But honestly, I feel markets were overdue a setback. US markets hadn't posted a 5% fall for almost 400 days - surpassing records set decades ago. It was a matter of when, not if.

This too shall pass

What about that 'yes'?

Well, yes, I could say in a decade it's likely this recent tumult will be long forgotten. In fact, I suspect it's likely it'll be forgotten by this time next year.

There's no way of knowing that, though. Markets can do anything over the short term, and while they tend to go up over time, roughly one year in three they register a down year. Perhaps 2018 will be one of those years?

Who knows, but over the long term, I do believe equity investors should be rewarded.

Remember the recent all-time highs for stock indices worldwide came a decade on from the horrendous financial crisis. That was one of the most unsettling periods investors have ever lived through.

Historically, it hasn't paid to bet against capitalism for too long.

The value of lower share prices

So yes, I could say be calm, sit tight, think about the long term.

But I think it's more valuable to actually dwell a little on the current turmoil - to see your portfolios turn from green to red, and to understand shares can involve sometimes stomach-churning losses as well as those giddy gains.

New investors who were only drawn to equities by the recent string of record highs will have never known anything like these falls.

But older hands are very familiar with the feeling. The sense the bottom has dropped out of your portfolio, that nobody wants to buy and everyone wants to sell - that great companies are suddenly on offer at what seem like fire sale prices (though in a real bear market you'll be amazed how low prices can go.)

And because we're familiar with the market's mood swings - and our own emotional reactions to them - we hopefully construct portfolios we can hold through the tough times.

Perhaps we buy fewer 'blue sky' growth stocks. Maybe we underpin our portfolios with stalwarts that should deliver whatever the economic weather. We can hold bonds for ballast when shares decline. Maybe we hold cash as dry powder to deploy in a crash.

None of that is easy when markets rise every day, and you're seeing your returns lag the boasters on Twitter who seem to only own the highest-risk, highest-return winners.

But experience is a tough master, and going through this sort of volatility demonstrates why diversification and a long-term time horizon are essentials for equity investing.

We all need to discover that putting our money to work is harder than seeing a graph of the FTSE going from bottom left to top right and saying: "I could have done that."

Just as new soldiers discover the realities of war when they leave boot camp.

You see, that phrase used by marines is apparently also a mark of camaraderie and even a motto to proud of. Yes this can be tough, but it can and must be endured to succeed.

Welcome to the suck!

Avoid these pitfalls

To help you streamline your investment process, realise and understand the most common investor mis-steps, the Motley Fool has put together this new free report entitled The Worst Mistakes Investors Make.

The report is a collection of Foolish wisdom, which should help you avoid needlessly losing too many more profits. Click here to download your copy today.