Magic of the stock market revealed in a year

Published May 18, 2016   Posted in How to Think

This morning I continued my weekly ritual of glancing at how our stocks are doing in the market. Hey, look at that – another up-tick. Believe me, the realization that just a few months ago, I was about $80,000 poorer is definitely not lost on me.

But as of today, all our losses over the past year have been regained – and then some.

Portfolio balance from Personal Capital

Looking back over our investment portfolio’s recent history, I realized something amazingly powerful. To anyone who doesn’t quite understand the stock market and how it generates passive income, the market just finished showing us exactly how it works. How many willย learn from the lesson?

Pinterest: Magic of the stock market revealedThe screen shot from Personal Capital above depicts a nearly $80,000 difference in value and represents our portfolio balances thus far for 2016. Mid-February was our low point, and it seems like each and every day now sets newย highs for us. At the moment, the market is doing well.

But that wasn’t the case just a few months ago.

Over the past year, investors have witnessed incredible market fluctuations. 2016 started with the worst 10-day stretch in history. Everybody was losing money left and right (93% according to CNN Money). The reasons are immaterial. Some claim the market was generally overvalued. Others believe oil was the main culprit. Whatever. Stock brokers are irrational by nature. ย ๐Ÿ˜‰

Twitter and other social outlets lit up. Folks were frustrated, questioning the whole concept of relying on the stock market for passive income.

The causes – whatever they are, don’t matter. What is amazing is how well the last yearย represents the core workings of the market over the long term. It’s almost as if the market reached out and bitch-slapped the American people across the face, exclaiming “Watch this, you might learn something!”

The stock market naturally ebbs and flows

There are few “sure things” in this world, but the stock market, historically over the course of history, has proven to be a money maker. The key is to understand that short-term investing is incredibly risky and volatile. Looking at investment returns over a 6-month (or 6-week) period in a market designed to generate consistent long-term gains is dangerous and confusing.

Understand that just like people, the stock market is very emotional. Emotional people tend to exhibit wild swings, acting completely bat-shit nutty at times for no apparently reason. As an investor, you can’t control these swings; they just happen. Like your crazy uncle who won’t shut the hell up about a looming communist invasion, you just gotta go with the flow and let him do his thing. Take the bad with the good. After all, he is your uncle. And he’s always been a bit off.

Again, what the market does in the short term is immaterial; every once in a while, the market will go crazy. An economy controlled by people almost requires a dose of insanity every now and again.

Whether you are investing through an established brokerage company, like Glanmore Investments, or are going it alone – we all feel the same weirdness (craziness?).

Make no mistake about it: the frustration we experienced as of late is nothing compared to market craziness in our nation’s history. Think about the Great Depression when the market lost a ridiculous 11% of its value at the opening bell on “Black Thursday” – October 24th, 1929. Or the years of “stagnation” during the 1970s. Or the housing market collapse in 2009. These were serious blows to our market and virtually every investor.

But look around you. We recovered.

The idea is to make money over the course of years, which turn into decades. Market growth is exponential. Money makes money, and more money makes even more! Thus, frustrations and market criticisms of short-term market losses are generally unfounded and ignoreย the entire point of investing. The market isn’t a get-rich-quick scheme. That is the lesson it just tried to teach us.

If Joe had invested a ton of money in the market last December, but didn’t understand how the market works, Joe probably would have cried into his beer some time in mid-February. I’ll shed a tear for him too, but only due to my sadness over Joe’s inability to understand the plain and simple workings of the stock market.

For example, since its inception in 1928, the S&P has realized an average rate of return of 10% – or 7% after adjusting for inflation (the buying power of money). If dividends were reinvested over the course of this 90-year period, gains would be quite a bit higher. Not bad.

However, this doesn’t mean investors are guaranteed a 10% return on their money virtually any time they invest. Thus far in 2016, the S&P’s rate of return is right around 1.1%, but it bottomed out February 11th at NEGATIVE 10%. We all lost money – temporarily.

It happens, and it’s primarily dumb luck how well you do over the short-term. But as the market has shown over the course of its history – and even over the course of the last year, clamoring over ebbs and flows is a fool’s game because the market will always ebb and flow. It’s what it does.

And now, the great majority of us are making cash again because the market now flow-eth. That is also what it does.

Enjoy the ride!

How many of you lost a bunch of money last February, but are now enjoying an overall increase in your year-to-date investment portfolio?

We track our net worth using Personal Capital


36 responses to “Magic of the stock market revealed in a year”

  1. Big dip in February and big increase recently. Just imagine if you didn’t check the market or accounts weekly or monthly. You’d never even know the event happen. All about the long term plan.

    • Steve says:

      Ha! Good point, Brian. If you hadn’t checked earlier in the year, you probably wouldn’t know of the dip the market took. ๐Ÿ™‚

  2. Yep, you just have to ride out the waves. Great explanation of how very normal this is.

  3. Very good reminder! Sometimes you just have to hold on tight and brace yourself, you know it will be a bumpy ride. Have faith, have tunnel vision, and stay focused on the long term!

    • Steve says:

      Stay focused on the long term – yup, because the long term seems to work out when the stock market is involved. Well said, Green Swan. ๐Ÿ™‚

  4. This might be my favorite of your recent posts, Steve. Like most, I took a painful hit in February. However, I’m not complaining, because as you said, I have since recovered just fine. As an added benefit, the struggling market was one of the motivating factors in my decision to pay off my MA loans in lieu of upping investment contributions.

    • Steve says:

      Thanks FinanceSuperhero, appreciate your kind words. Nothing wrong with getting those loans paid off sooner rather than later. Being debt-free is a huge contributing factor to building real wealth. You’re on the right track, for sure. ๐Ÿ™‚

  5. Apathy Ends says:

    The last year was the first time I saw negative returns on my quarterly 401k statement – thankfully I had been reading and preparing for those moments and didn’t have an epic freak out

    Once people understand dollar cost averaging they should cheer (if they are still contributing)

    I have stopped reading a lot of money sites – the constant doom predictions piss me off

    • Steve says:

      Agreed, Apathy Ends – I don’t pay attention to doom and gloom scenarios either. I’ve read a bunch of them in the past too. The fact is nobody has a clue what is going to happen. The market is a fickle thing with a mind of its own and controlled by emotional and often irrational people. It’s a crap shoot sometimes, but over the long haul, works for the great majority of people who invest in it.

  6. I think it is important to keep yourself informed of what is going on in the world and what is going on with the companies you have stock in. That way you can understand the reasoning behind some of the ebb and flow. You may not be able to predict it but it won’t be such a shock when it happens and you won’t make irrational gut choices when your stocks swing in value.

    • Steve says:

      Acting irrationally is definitely one way to lose money in the market. Keeping it in and letting your stash rise and fall with the market usually works out. Just let it go. ๐Ÿ™‚

  7. Eric B says:

    Can you clarify the comment about how reinvesting dividends would have improved S&P 500 returns?

    It sounds like there are multiple S&P 500 indexes that account (or don’t account) for dividends differently.

    • Steve says:

      Eric – I meant that by reinvesting your dividends instead of taking them out in the form of checks, you’ll grow a bigger and bigger stash due to those reinvestments, which in turn will build a more solid foundation for future exponential growth. We always reinvest our dividends instead of cashing them out.

  8. I am, but it is just hovering over zero. Honestly I kind of hope things stall for a couple of years and then really take off!

    • Steve says:

      Yeah, we aren’t much over 1% I don’t think either at this point. But that’s fine – slow and steady growth is what the market is all about. ๐Ÿ™‚

  9. Tawcan says:

    Stock market has a tendency to go up in the long run. We’ve definitely recovered from the Feb drop. This is why you shouldn’t bother checking your portfolio value on a daily basis. ๐Ÿ™‚

    • Steve says:

      There is definitely wisdom in not checking on your portfolio on a daily basis. I am probably on a weekly basis now based only on sheer curiosity. ๐Ÿ™‚

  10. AND… I think it’s set for a bit downturn soon. If we can all just sit back and not panic, we’ll all be fine! I love that no 30-year rolling market period has ever lost money. Stick to the long view. And, as you say, enjoy the ride!

    • Steve says:

      Thanks Maggie – and yup, stick to the long view and enjoy the ride. Can’t get much more straightforward than that! ๐Ÿ™‚

  11. Carl Pascale says:

    I’m an early retiree, at 55 and now 59. My wife and I have continued to stay invested in a 70/30 mix of stocks and bonds. You’re right Steve. The best approach to investing is to stop paying attention to what happens day to day. I always say that I invest the way I do because I don’t know what will happen this year but I’m certain that the result will be positive over ten years.

    • Steve says:

      Thanks for your comment, Carl. I love your attitude, and you’re right, I don’t know either what will happen this year or next, but over time, smart investors will make money.

  12. Stockbeard says:

    How dare you insult my uncle and his theories on communist invasion!

    Seriously though: Yup, I freaked out in February, and I’m freaking out much less today. I know there will be other opportunities to freak out though… I guess I’m becoming more sensitive to those as I’m getting closer to my FI number…

    • Steve says:

      My deepest apologies regarding your uncle! ๐Ÿ™‚

      And yeah, there will always be opportunities to freak out. And it’s even okay to freak out as long as you don’t do something rash like pull all of your money out of the market. ๐Ÿ˜‰

  13. I’m still in the red for my Roth and our taxable account, but part of that has to do with when we started. Still, I’m white knuckling my way through this and trying to enjoy the ride. Long term, long term, long term. I actually should probably weave that phrase into my Vanguard password. ๐Ÿ˜‰

    • Steve says:

      Hey Penny – yeah, your starting point will affect things, but in the end, it won’t matter much when you started. Just like the rest of us, you’ll have lots more green than when you started out. It’s a wonderful feeling! ๐Ÿ™‚

  14. Jason says:

    I actually want a new bear market to be official (I think we actually are in one) so that we can get it over with and move with the next bull. Trying to explain that one needs to be in for the long haul even with these fluctuations is difficult for some, particularly for my students.

    • Steve says:

      You and me both, Jason. It’s the right time for me personally since we’ll be retired next year and living entirely off of our savings. You NEED fluctuations to make serious money, ironically.

  15. I’m currently at all time highs… It happens regularly for someone in the beginning of their wealth building years like myself. Right now contributions rule all, but market fluctuations also have a big effect. Luckily I don’t get too emotional about this stuff, and I’m all about the long-game.

  16. Yes, I definitely remember the “February Dip” well because I gave my resignation notice for early retirement to my boss on 2/9/16. Nice time to do it when the market was in a -10% swoon! Fortunately, we entered early retirement with ~3 years of spending in cash, so I knew we could ride out all but the most severe market declines without cashing any bond funds or stocks out.

    • Steve says:

      Amen to that, MrFireStation. Our goal is exactly yours, around 3 years of living expenses in cash so we don’t have to touch our investments for that long. ๐Ÿ˜‰

      • Mary Stahl says:

        Curious how you start the process of getting three years of cash. Selling investments, saving along the way, etc? (if there is a post on this then yay! I’m new) Hard to keep that money out of the market and/or remove that chunk from the FI total nestegg slated to keep growing. We have 7 more work years till hubby is 60, then live off 3-4% a year till RMDs & SS @ 70 kicks in. Thanks.

        • Steve says:

          Excellent question, Mary. Really, it’s as simple as devoting more of our savings over to it rather than funneling it towards our brokerage account. It’s really just a redirection of extra cash from longer term savings to shorter term. We started a few months ago, so by the time that we officially retire, we should have enough in our short-term savings to live out a few years before having to touch our investments.

  17. Certainly can’t argue with almost 90+ years of proven track record and 10% average returns. The only place I can think of I would rather put my cash would be real estate. Curious whether you have any in your ‘portfolio’?

    • Steve says:

      Nope, I don’t invest in real estate – no real reason why, either…just never did it. Honestly, I don’t see that changing, either. Good ol’ index funds and managed targeted retirement accounts are good enough for me.

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