Becoming Comfortable, Being Uncomfortable

January 21, 2019, by pathwise

By definition, investing is an uncomfortable process. You are taking something very tangible today (mainly dollars) and placing them into investments that have an inherently uncertain future. Why do we do this? If you recall from one of the first meetings you had when you joined PathWise, we discussed that merely sitting on cash is not a long-term, sustainable solution for savings. Inflation will eat away your purchasing power over time, and that “time” is getting longer and longer as our “retired” lives tend to approximate the length of our “working” lives now. As time goes on, you must replace your income from work (human capital) with income from investments (financial capital). However, uncertainty is a very uncomfortable feeling. With investing, that comes about through volatility in your investments. You see, we have solid data and powerful evidence that our approach to investing is efficient, low cost, and works. However, it works in the long-run….10+ years. And the reality is that when the markets get choppy, a month like December feels bad, a negative year scary, a recession period like the end of the world, and 10+ years an impossible eternity. But that is how investing works and we are here to tell you that the process we implement is based on sound research. But there absolutely will be periods where our process may seem “broken.” Remember, if you put your money into the S&P500 in 2000 and looked at your account in 2010, it would not have even budged. Your return would have been close to 0% over those ten years, and you would have rightfully been questioning the wisdom of investing.

However, short-term volatility is very healthy and expected. December reminded us of that. So far in 2019, the markets are much calmer and moving in a much more positive direction. To be sure, we expect the markets to make some big moves over the next 11 1/2 months. Where they end is anyone’s guess, but seeing the Dow drop 800-1000+ points would not be out of the ordinary. The problem is that we went through 2017, which one can call a near-perfect market. The stars truly aligned in 2017 and we had one of the calmest, upward moving markets on record. This made 2018 feel downright like a precursor to another 2008 and people naturally became worried. Rather than discuss the moves that will most certainly come, we wanted to send this reminder during this period of relative calm. Again, if you are working with us and still “saving” then think of market moves down as great ways to buy stuff on the cheap. Each month that you save money, you get to buy things at a discount if the markets happen to be down. If we are already creating income from your investments and you are not in the “accumulation” stage, then we have a variety of safety measures in your portfolio explicitly designed for unpredictable and often painful moves down. But please look at the data in the included chart. You will see that if we look back to the beginning of the S&P500 index, 2018 was downright an average year. It’s when you compare 2017 to the average, that you see the exception was not in what happened in 2018, but rather what happened to 2017.