If you are in the process of saving and populating that investment plan designed for a goal that is multiple decades out, you don’t want the markets to go anywhere while you are pumping money into that plan. And then, right when you are about to retire, you want the biggest bull market in history to allow for all that dry powder in the form of accumulated savings to really ignite. And that’s the dream. So it depends on where you are in life – are you in the wealth accumulation phase or decumulation phase and that decides how you want the capital markets to behave.
So why you might not want the markets to go anywhere? Say you are just starting out in your career and an enlightened 25 year old that you are, you sign up for that retirement plan at work and since you know the value of time in the market, you try to take maximum advantage of that plan and save and save like a maniac. You do that for a few years and now you are sitting pretty with a $50,000 investment balance in that plan. And then the market takes off and jumps 20% and now you have $60,000 and you are so happy. But that’s a problem because you just started investing with a lion-share of the contributions likely to occur in the future. That 20% bump means that anything you buy in the future would be 20% more expensive. That same bump in the value of your portfolio a few years before retirement is a completely different thing though. Now that can have a material impact on your quality of life through retirement because that bump occurs on a much larger investment balance. So you want those gains to come later in life on a portfolio that has some heft to it.
Now rooting for a flat to down market during the accumulation phase of your life is fine but that scenario would likely be associated with a general malaise in the economy. And we know what that entails. Companies would be looking to improve their bottom-lines and that means cutting costs. Their biggest cost is likely you. The other end is also possible. That is a market that goes nowhere even though earnings and revenues for the companies in the economy in aggregate are expanding. That happens when valuations are compressing and investors’ appetite of overpaying for a dollar of earnings wanes. That reversion to the mean is actually a good thing but either scenarios work to your advantage but the second one is much more palatable to limit that likelihood of an interruption in your income and hence contributions to your plan.
And markets can stay flat for a long, long time. Just how long? How about 17 years. Going back in time…the Dow Jones Industrial Average in January of 1966 hit a level of 990. It would continue trading in a range of roughly 600 to 1,000 over the ensuing 17 years. It once again reached 990 in December of 1982 before finally breaking out and heading higher, never looking back in what turned out to be one of the greatest bull markets in this country’s history.
What if you entered the workforce right around 1966 and started contributing to your investment plan? What appeared to be a bad time to be an investor was actually the best time to be one. And if you kept at it, continuously feeding that plan through those 17 years, you were basically done by the late 80’s or early 90’s. But how many investors do you thing remained invested through those years? And more than that, how many of them kept feeding their plans? Bet not that many.
Or take someone who started investing in say 2000, right around the dot-com implosion. The domestic stock markets stayed flat for a decade but those who continued contributing in their plans through that decade enjoyed a triple in their domestic stock allocation since then.
So are we heading towards another bout of a flat to down market? No one knows but the data sure does point to that fact, at least for the domestic stock and bond markets. But what should or can we do about that? Not much. All we know is that this too will eventually work out to your advantage if you are in the midst of populating and feeding your plan.
So the next time the market gaps up by a big amount, don’t rejoice as in the long run, it might be to your disadvantage. And if it gaps down, celebrate because that next contribution to your plan would buy more shares at lower prices. And in all of this, maintain a diversified portfolio that is globally allocated across market sectors and capitalization and stay invested.
Image credit – JP Carrascal, Flickr