Arbor Wealth: Pullbacks, plants, investments and the Eagles
“You don’t have to prove nothin’ to nobody …
Just take good care of yourself.” — from “Not Enough Love in the World” as performed by Don Henley
Corrections and pullbacks are healthy for investors because markets that ascend without interruption are much more subject to crashes. Pullbacks provide buying opportunities and protect markets from becoming overheated. The rapid market advances and subsequent declines surrounding the dot-com and housing bubbles represent escalating markets without corrections. And when those pullbacks came, they arrived with a vengeance.
That said, it is very difficult for investors to watch their accounts temporarily dwindle in value. One reason this is so disheartening is that markets never seem to recover as quickly as they drop.
Say you invest $100 in the market. If it drops 50 percent you now have $50 left, right? Now say that the very next week, the market climbs 50 percent. You would think you’ve recouped your losses, but you haven’t. You actually need a 100 percent gain to get back to square one.
So is investing a losing proposition? No. Here are a couple of comforting considerations. When the S&P 500 falls by a certain percentage, your portfolio is unlikely to mirror those losses. Unless you own those exact stocks in that exact proportion and nothing else, your results will be different. Investors are often well served by purchasing companies that are unlikely to match the broader market’s fall in tough times. In other words, when markets tumble, companies that have very stable cash flow or provide essential goods and services typically hold up better than companies that rely on optimistic consumers or robust global growth.
One of the most important factors in long term investment success is avoiding large portfolio losses. No one can avoid temporary losses, but preventing 20 and 30 percent declines is extremely important in long-term wealth building.
Markets do tend to trend upwards over time. I love flowers and plants, and like to compare them to investments. Plants need both sunshine and rain. Constant rain will drown them; constant sun will burn them. They need the full complement of changing weather to grow. The same is true for investments.
Over time, investments will enjoy more good days than bad, just as plants will see more sunshine than rain. Despite intermittent patterns of blustery, cold weather, what we see the most of is sunshine. And over time, what we see most in investing is rising valuations.
What really drives investment returns is the value of the companies in which you are invested. Corporate profits and profit margins are strong and look likely to remain that way for the time being. So despite the recent storms, many equities that have been blown around by volatile winds remain likely to grow into taller and stronger plants.
Margaret R. McDowell, ChFC, AIF, a syndicated economic columnist, is the founder of Arbor Wealth Management, LLC, (850-608-6121 — www.arborwealth.net), a “fee-only” registered investment advisory firm located near Sandestin. This column should not be considered personalized investment advice and provides no assurance that any specific strategy or investment will be suitable or profitable for an investor.