“The bigger they are, the harder they fall.”
This saying has traditionally referred to battles or fights in which the larger opponent hits the ground hard when knocked out or defeated. But it can also refer to the financial markets.
For example, consider the S&P 500 index, which is generally considered to be the main benchmark for gauging stock market performance. The S&P 500 is currently sitting at a level of around 3,000 points. But a decade ago, the S&P 500 bottomed out at 676 points after the onset of the financial crisis.
Now let’s look at what a drop of 20 points means with the S&P 500 at these two different levels. If the S&P 500 fell 20 points in one day a decade ago, this would have represented a fall of almost 3 percent, which is pretty drastic. But a 20-point fall today is a drop of only about 0.6 percent, which is far less drastic.
This is worth keeping in mind when viewing stock market volatility. A 1 percent drop in the S&P 500 today would mean a loss of about 30 points. Translated to dollars, this represents a market shift of about $250 billion given the S&P 500’s total value of about $25 trillion.
A decade ago, however, the total value of the S&P 500 was only about $8 trillion. A fall of just 7 points would have represented a 1 percent drop in the market, or a market shift of about $80 billion.
What Are Investment Gains and Losses?
With all of the economic uncertainty going on today — from the U.S.-China trade war to fears that the long-running economic expansion might finally be running out of steam and a recession imminent — it’s not uncommon for the S&P 500 to rise or fall by 1 percent, 2 percent or even 3 percent in a single day. Given how large the S&P 500 has grown, these kinds of swings can represent the gain or loss of hundreds of billions of dollars daily.
But does this mean that U.S. corporations and your investment portfolio have really gained or lost this much money? Not at all. In fact, with the stock market at its current sky-high level, daily market movements tend to exaggerate how much has really changed. And this can have an effect on investors’ emotions.
The important thing to remember is that there’s a big difference between a short-term rise or fall in the S&P 500 or the Dow Jones Industrial Average and the actual gain or loss of money. Regardless of daily stock market movements, you haven’t made or lost any real money until you sell securities.
For example, during the Great Recession and subsequent bear market of 2008-2009, Warren Buffett “lost” $25 billion as measured by his total net worth, which fell from $62 billion to $37 billion in just one year. Today, Buffett’s net worth has shot up to about $86 billion, making him the third-richest person in the world.
Remove a Few Zeros
While very few of us can relate to having a net worth that’s measured in the billions of dollars, the same investing principles apply to average investors. We just have to remove a few zeros from the numbers.
For example, the S&P 500 lost almost half of its value during the 2008-2009 bear market. So if you had a $500,000 retirement portfolio fully invested in an S&P 500 index fund at that time, it would have fallen to around $250,000.
Does that mean that you would have “lost” $250,000? No — unless you sold all of your securities at the very bottom of the market drop. If you had stuck it out and left your portfolio alone, you’d have enjoyed the market bounce-back that has seen the S&P 500 soar to over 3,000 points.
Stay Focused on the Long Term
One of the biggest keys to meeting long-term investing goals like retirement is not letting short-term market volatility disrupt your long-range goals and plans. The performance of the stock market over the past decade since the Great Recession is a good example of the benefits of staying in the market even when things look dire.
Give us a call if you have more questions about dealing with market volatility and devising a successful retirement investing strategy.