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I’ve got a good story about how two Advisor friends of mine, Eric and Lisa, deal with their clients when the markets become unsettled. They help their clients put risk in perspective. When times get tough, keep this story in mind.
During one especially troublesome bear market, Eric and Lisa sent their clients a letter, asking them an interesting question. What do going to the dentist and investing have in common? The answer is that both involve risk, the risk being the possibility of pain. The key is to mitigate the pain.
With the dentist, the risk is that we may have to undergo some pain in order to maintain proper oral hygiene. To mitigate the pain, dentists use Lidocaine or a similar nerve blocker. With investing we may have to undergo some pain in order to achieve our goals. What mitigates the pain of short-term stock market discomfort? Time.
Is the pain worth it? Of course it is. We go to the dentist and we invest for the future because the consequences of not doing so are devastating. We accept investment risk because the painful alternative is not having a comfortable retirement or not having adequate college education savings for our children.
We don’t like the pain of a dentist’s drill or the pain of losing money, even if it’s only on paper. But it is part of the remedy. Asking ourselves how much investment risk we want to take is as silly as the dentist asking us how much pain we’d like. There’s only one answer, as little as possible.
We don’t like risk, but, in the long run, it’s both necessary and beneficial. It’s worth it. Bull markets last for a bit longer than five years. Bear markets last for less than 10 months on average.
On August 23, 2023, Wayne Duggan wrote an article for Forbes Advisor entitled ‘A History Of U.S. Bull Markets, 1957 to 2022.’ According to Mr. Duggan, ‘there have been 12 bull markets since the S&P 500 launched back in 1957, meaning a new one has started roughly once every 5.5 years. Despite the stock market’s ups and downs, the dozen bull markets over the last six decades have helped the S&P 500 generate a total return of more than 65,000% since 1957.’
According to tradethatswing.com, “the average yearly return of the S&P 500 is 10.54% over the last 100 years, as of the end of December 2023. This assumes dividends are reinvested. Dividends account for about 40% of the total gain over this period. Adjusted for inflation, the 100-year average stock market return (including dividends) is 7.4%.
According to Mr. Duggan, “Since 1957, the average bull market has lasted nearly five years and generated an average S&P 500 return of more than 169%. Bull markets have historically performed best during the first year following the previous bear market bottom, averaging a 41.8% gain.
According to Brian Baker, CFA, in a July 12, 2022, article on bankrate.com, entitled ‘The S&P 500 is in a bear market: How much lower could it go?’, the average bear market since 1929 has resulted in a roughly 37 percent decline in the S&P 500 and it has taken an average of 344 days, or nearly a year, for the market to reach its bear market bottom.
Whether you are visiting your dentist or your Financial Advisor, the short-term pain pales next to the long-term reward.