Every quarter JP Morgan distributes their Guide to the Markets piece. Dr. David Kelly and his colleagues prepare perhaps the most extensive, yet concise set of data charts on the markets and the economy available. These charts are timely as the news is currently dominated by the short-term issues surrounding the shutdown. At times like these it can be helpful for investors to take a step back and gain some perspective.
The long view of the stock market
This chart showing the S&P 500 Index from 1900 through September 30, 2013 covers a lot of history including two World Wars, the Great Depression, Vietnam, the tragedy of 9/11, and the financial meltdown of 2008-09 to name just a few events. Yet over time, with a lot of bumps in the road to be sure, the overall trend is up. The past is no indication or guarantee of what might happen in the future, but it is helpful to step back and look at the longer term trends while listening to the all of this gibberish about the shutdown and its possible implications.
What should you do with your investments in response to the government shutdown? In my opinion nothing. I’ve been in this business since the mid 1990s and there is always some big event happening. In the long run I’ve found that it is a good idea to stick with your long-term financial plan rather than reacting to every economic or political event.
Time and diversification heals many wounds
This next chart illustrates that benefit of being a longer-term investor. The chart shows the variation in the returns of stocks and bonds over 1 year annual periods and rolling 5, 10, and 20 year rolling periods. As you can see there are wide fluctuations in the returns for stocks over these 62 annual periods, less fluctuation for bonds, and still less for the hypothetical mix of 50% stocks and 50% bonds.
The fluctuation of just stocks, just bonds, and the 50/50 mix is reduced over 5 year rolling periods and reduced even further over 10 and 20 rolling time periods. Again, to put this chart into perspective the time period 1950-2012 covers a lot of history including many periods of political and economic fluctuation.
The take-away here is that diversification and a longer-term investing horizon reduce investment volatility.
As I write this we are entering day 3 of the government shutdown. Our so-called leaders in Washington are still posturing and playing politics with the issue of funding the government. Certainly if this drags on this could become a more serious issue, more so if we get to mid-October and we hit the country’s debt ceiling limit.
However, investors should keep in mind that there’s always something. Stepping back and reviewing charts like those above can lend some perspective to the madness of situations like the shutdown. While we don’t know where this is all headed, I suggest focusing on your long-term financial plan and goals such as retirement.
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