Summer Letter to Clients {Conclusion}

Today we conclude our summer letter to clients originally dated July 25, 2014.  Please note that the next post here will be next Wednesday as I have some work related traveling.

So what do the numbers show?  First, the bad news.  The average intra-year decline for the S&P 500 is 14.4% according to JP Morgan.  Thus, on average, stocks at some point during each year covered by the data had an event that caused investors to head for the exits resulting in an average decline of over 14%. In dollar terms this means that an account worth $100,000 at some point on average saw it’s value slip to about $84,000.  Sometimes, particularly in bullish periods, those declines are relatively benign.  The mid-1990’s for example rarely saw an intra-year decline above 10%.  At other times those declines were more severe.  Nine years saw declines not associated with bear markets but were in excess of 10%.  Six years, many associated with economic contraction or foreign turmoil, saw declines in excess of 20%.  Those losses were worse in the 2000’s multi-year bear market period. 

The positive side to this is that stocks advanced 26 of the 33 completed years or nearly 80% of the time.  The average annualized return 1980-2013 is nearly 12%.  A dollar invested in 1980 would be worth $44.55 today if reinvested and left alone.^  That’s just using a simple buy and hold strategy across an index which was hard to until about the mid-1990’s.  Today there are many ETFs or mutual funds that let you do exactly that.  That analysis also doesn’t include what might have occurred if you follow one of our primary investment mantras which is to have a strategy to sow away some cash for these intra-year declines and a discipline to put some of that cash to work when stocks again became cheap.  The long and short is if you sign up for the markets then you have to be able to put up with volatility.  Most investors hate volatility because it leads to uncertainty and at least for a certain period of time a decline in the value of their assets.  However, I hope that I’ve shown that volatility can be used as a significant part of the game plan, particularly if you have the strategies and disciplines to deal with it when it inevitably shows up. 

Very truly yours,

Christopher R. English

*JP Morgan Asset Management, Guide to the Markets:  3Q | 2014.  This publication is updated quarterly and is full of useful charts and statistics.  The subjects covered include the economy, the stock and fixed income markets as well as international sectors and commodities.  You can access it at www.JPMorganfunds.com, go to “Insights” and then click on “Guide to the Markets”.  

^You can go to www.moneychimp.com , look for the section on compound annual growth rate and plug in  January 1, 1980 and December 31, 2013 to see how I came up with these calculations.  The dollar amounts are not adjusted for inflation.

**Long ETFs related to the S&P 500 in client and personal accounts although these positions can change at any time.