Are we having fun yet? I take no pleasure in seeing my portfolio shrink, but I love buying stock index funds at discount prices and I’m always amused by the hand-wringing in the financial media.
Two years ago, we were hiding out in our homes, fretting over a global pandemic and worrying about an economic collapse. Today, COVID-19 is still spreading like wildfire, but vaccines have helped slash the number of hospitalizations and deaths, the unemployment rate is just 3.6% —barely above the 50-year low of 3.5% —and folks are spending so merrily that we ‘ve ended up with 8.6% inflation. Clearly, all is not right with the world, but that doesn’t seem to justify today’s widespread pessimism.
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In fact, you can count me among the optimists. Worried about your investment losses? Keep these four ideas in mind:
Expectations. The financial markets already reflect what’s happened and what the consensus expects. Will the news in the months ahead be surprisingly bad — or not quite as bad as feared? If it’s the former, the stock-market sale will likely last a few months more. If it’s the latter, we’ll look back and wistfully wish we’d bought in June 2022.
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History. If we include the Great Depression, the average bear market decline is 38%. The S&P 500 SPX,
is currently down 18% and it was down as much as 24% earlier this month. If this is a typical bear market, we’re roughly halfway through. My contention: It’s too late to be selling.
Intrinsic value. As stocks have tumbled in 2022, the yield to investors — in the form of stock buybacks and dividends — has climbed from under 3.5% to perhaps 4.2%. That higher yield suggests the intrinsic value of stocks is also now higher. On the other hand, intrinsic value may have fallen because investors are now discounting the cash kicked off by corporations at, say, 10% rather than 8%, reflecting today’s greater uncertainty.
If intrinsic value has climbed, it means stocks are better value than six months ago. If the discount rate has increased, it means investors are now demanding a higher return as the price for holding stocks. So, which is it, better value or higher future returns? I have no clue — but I’m good with either.
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Time horizon. As shares slump, investors’ time horizon shrinks. Suddenly, all many folks can think about is whether stock prices will rise or fall in the days ahead, and their best guess drives their trading decisions.
This is where savvy investors get their edge. It’s tough to outsmart other investors. But we can play a different game — by focusing not on next week but on the next 10 years. Does anybody doubt that a globally diversified stock portfolio will be worth more a decade from now? When we play the long game, figuring out what to do becomes a whole lot easier.
This column first appeared on Humble Dollar. It was republished with permission.