“Fear is the path to the dark side. Fear leads to anger, anger leads to hate, hate leads to suffering”. -Yoda
The markets today are reaching heights we could only dream of a decade ago. Yet, despite this remarkable recovery since the 2008 Great Recession, fear still looms large in the minds of many investors.
I sometimes joke that more money is lost in preparing for the next market crash than in the actual crash itself, due to the cost of missed opportunity by sitting on the sidelines while the market surges higher.
How can this happen when equity markets have been such an incredible tool of passive wealth creation throughout history? Why are people so afraid of these brief downturns and willing to risk their long-term wealth creation to avoid them? It's a simple answer, we all anchor to the highest point our portfolio ever reached.
For example, an investor who grew their $500,000 portfolio to $1 million, only to see it drop to $700,000, rarely says, "I'm still up $200,000." Instead, they focus on the perceived loss: "I lost $300,000."
"The first rule of compounding: Never interrupt it unnecessarily." -Charlie Munger
Unfortunately the financial industry has no shortage of fear-mongering snake oil salesmen. Take for instance Mr. Harry Dent who has served us repeated terrible forecasts on a platter over the years. His book below was published in September…. of 2012.
Had you taken the $20 or so his book probably cost and just bought the Vanguard Total Stock Market ETF (VTI) at the start of September 2012, then by the end of October 2024 you’d have about $96.88.
Two great things would have happened:
So don't listen to Harry unless you want to leave a Dent in your portfolio.
It’s easy to laugh about the past failed predictions from the likes of Harry Dent, but will you fall for the next clickbait? Every social media platform and news organization is doing what they can to keep you engaged, and blasting out a few scary headlines can help, such as predicting the next Great Depression.
About once a month I receive a call or email from a client asking my thoughts on a scary headline they read about the next market collapse being around the corner. I tell them I have seen that prediction every single month for the entire 13+ years I have been an advisor. Don't believe me? Here are some of the receipts:
Over the last month I have heard from clients that are quite concerned from the election results, and I also have heard from clients who are enthusiastic about the results.
Who is right?
I’ll get back to you in 4 years on that. I am not in the business of pretending to know the future. I would have leaned towards optimism no matter who won.
History consistently demonstrates that businesses and markets adapt and persevere through challenges. While downturns are inevitable, they are also temporary, and resilience often leads to long-term gains.
We are likely to see multiple 15%+ drops in equity prices over the next 4 years and we are likely to see continued long-term gains despite those short-term declines.
How do I know this?
Because on average we see nearly a 15% drop happen every single year. Here below we see the beautiful visual from JP Morgan Asset Management, depicting that on average we see a 14.2% decline every single year.
Despite all those red dots, 33 of the 44 years ended in positive territory, and from 1980-2023 the 500 Index compounded at 11.63% turning $1 into $126 for the investors that stayed put.
Sounds easy right? In hindsight everything is easy. We all should have bought Bitcoins at $5.
Those red dots shown above often come when scary things are happening in the world. Fear compounds at a much greater clip than stocks do. When things are bad, it is natural to think they will get worse before they get better.
Today it is different, because your fear will likely be reinforced by an algorithm on Facebook, Instagram, or Twitter. If you are looking for reasons to be fearful, you will find them with ease. If you are looking for reasons to be optimistic, visit the Meredith Wealth Planning blog (shameless plug).
Let's say you are retired or about to retire, and now you have this unsettling fear that the politician you despise is running the show. Tariffs? Nuclear bombs? Dismantling government agencies? You think the retirement you planned decades for could now be wiped out in no time. What should you do?
This is a plan one can be confident in no matter who is President.
Fear is natural, but it doesn’t have to dictate your financial future. By staying informed, sticking to your plan, and tuning out the noise, you can ensure that your retirement dreams remain on track—no matter what the headlines say.
Disclosures: This article is for informational purposes only and should not be considered a recommendation. Information contained in this article is obtained from third party resources that Meredith Wealth Planning deems to be reliable. Consult with a financial advisor before implementing any strategies. Past performance does not equal future results. Meredith Wealth Planning does not guarantee any minimum level of investment performance or the success of any index portfolio, index, mutual fund or investment strategy. You cannot invest directly into an index, and index returns do not account for real life fees and transaction costs.
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