In life, what do we know is certain? Death for one, and the inner Libertarian would say taxes, yet another important certainty is uncertainty. We’re all quite accustomed to uncertainty (at least when it doesn’t involve the fluctuation in the value of one’s retirement assets).
There’s a constant superfluity of invisible probabilities at work dictating positive or negative outcomes. Those incognito, yet meaningful, variables usually go unnoticed, but they’re very real.
For instance, the American Cancer Society finds that there is a 42.05 percent chance for men and 37.58 percent chance for women of developing some form of cancer during their lifetime, but there is also a 77.38 percent (men) and 80.87 percent (women) chance that those diagnosed with the dreadful disease will survive.1
Driving is another example. Statistically, a driver will have an accident serious enough to file an insurance claim every 17.9 years. Thus, if you begin driving at age 16, you are statistically predetermined to have at least one accident by the age of 34 and about four crashes during your lifetime. About three in every 1,000 accidents are fatal. 2
The scenarios are real when they happen close to home, but we nonetheless carry on, subconsciously accepting the possibility of an occurrence without dedicating any real emotional capital.
Now juxtapose this with the daily probability of loss (or gain) in one’s retirement plan assets and the emotional involvement applied there, especially in times of economic strife.
Investment markets have always been volatile. Why wouldn’t they be? Any market is simply a massive conglomerate of emotional people buying and selling differently-styled ownership claims of intrinsic value based on an underlying enterprise’s assets and potential future earnings power.
It’s certainly a beautiful mess, one that on a micro-level is constantly in flux and apparent disarray, but on a macro-level, it persistently propels us all into the future, raising the standard of living along the way.
When looking at the last half-century of U.S. equity market returns (using the S&P 500 index to illustrate) bear markets have been much shorter than bull markets.
Since 1950, the approximate average length of bear markets has been 300 market days, with an average price decline of 35 percent, while the approximate average bull market during that time, not including the most recent (which was longer than the average), lasted around 1,292 market days, with an average market-bottom to peak expansion of 164 percent. 3
Thus, each bear market over the past 70 years or so, has been followed not only by full recovery of any losses incurred during the downturn but also substantial excess growth thereafter.
With the precedent of an historic higher probability of market growth, it’s curious why real probabilities of life altering events are worried about so little, while short-term investment fluctuations are so highly and emotionally scrutinized, despite clear evidence that “staying the course” is a time-tested successful strategy.
Perhaps the difference is the illusion of control. You could most certainly divert your retirement nest egg to sit in cash to “retain principal,” but the only option for most investors is to take variability of principal risk in an attempt to out-earn inflation’s incessant degradation and to take advantage of compounding growth to achieve some purpose.
Most remember the last few painful market downturns with vivid clarity, but can’t accurately detail the last bull market or even strong growth year (we’ve been in a bull market for most of the last decade).
Once you have established a diversified allocation of transparent and well-managed investments, where confidence in the process and approach is essential, and one without too much idiosyncratic (concentrated) risk, your long-term outcome will hinge predominately on behavior.
Concluding that, like cancer, a car accident, or the many other probabilities constantly at play in your life, investment fluctuation (sometimes substantial fluctuation), is not only a foregone conclusion but also, it’s a necessity in your quest to achieve something greater than your past.
Your hard earned surplus of capital which you have painstakingly accumulated over time will certainly change in value but take those momentary moments of strife to remember why you invested in the first place. Reaffirm your confidence in the portfolio and process. Adjust that emotional, short-sighted gaze to the future where you’ll surprisingly discover the warm light of an early dawn by embracing the unrelenting uncertainty of life.
Alexander Lippert is Vice President of wealth management with Strategic Financial Partners.
Sources: 1) American Cancer Society 2) 2009 National Safety Council Report 3) Investment Resource Group, Securian Financial Services, The Advantage, April 2016, Volume 4, Issue 1.
