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Time for a Pep Talk

Jonathan Clements

ARE WE HAVING FUN yet? I take no pleasure in seeing my portfolio shrink, but I love buying stock index funds at discount prices and I’m always amused by the hand-wringing in the financial media.

Two years ago, we were hiding out in our homes, fretting over a global pandemic and worrying about an economic collapse. Today, COVID is still spreading like wildfire, but vaccines have helped slash the number of hospitalizations and deaths, the unemployment rate is just 3.6%—barely above the 50-year low of 3.5%—and folks are spending so merrily that we’ve ended up with 8.6% inflation. Clearly, all is not right with the world, but that doesn’t seem to justify today’s widespread pessimism.

In fact, you can count me among the optimists. Worried about your investment losses? Keep these four ideas in mind:

Expectations. The financial markets already reflect what’s happened and what the consensus expects. Will the news in the months ahead be surprisingly bad—or not quite as bad as feared? If it’s the former, the stock-market sale will likely last a few months more. If it’s the latter, we’ll look back and wistfully wish we’d bought in June 2022.

History. If we include the Great Depression, the average bear market decline is 38%. The S&P 500 is currently down 18% and it was down as much as 24% earlier this month. If this is a typical bear market, we’re roughly halfway through. My contention: It’s too late to be selling.

Intrinsic value. As stocks have tumbled in 2022, the yield to investors—in the form of stock buybacks and dividends—has climbed from under 3.5% to perhaps 4.2%. That higher yield suggests the intrinsic value of stocks is also now higher. On the other hand, intrinsic value may have fallen because investors are now discounting the cash kicked off by corporations at, say, 10% rather than 8%, reflecting today’s greater uncertainty.

If intrinsic value has climbed, it means stocks are better value than six months ago. If the discount rate has increased, it means investors are now demanding a higher return as the price for holding stocks. So, which is it, better value or higher future returns? I have no clue—but I’m good with either.

Time horizon. As shares slump, investors’ time horizon shrinks. Suddenly, all many folks can think about is whether stock prices will rise or fall in the days ahead, and their best guess drives their trading decisions.

This is where savvy investors get their edge. It’s tough to outsmart other investors. But we can play a different game—by focusing not on next week but on the next 10 years. Does anybody doubt that a globally diversified stock portfolio will be worth more a decade from now? When we play the long game, figuring out what to do becomes a whole lot easier.

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Bob Wilmes
Bob Wilmes
5 months ago

It helps to have a long term perspective at times like these. I remember a Jason Zweig Wall St Journal article about a company most people have never heard of – Balchem stock symbol BCPC.

https://www.wsj.com/amp/articles/the-best-stock-over-the-last-30-years-youve-never-heard-of-it-1454091554

As the article points out, there are literally handfuls of companies out there right now that may be the Balchem of 2040. Although most of our funds may remain committed to the Vanguard Total Stock Market index, it helps to hear about the Balchem’s of the world and buy some for your grandkids.

Rick Connor
Rick Connor
5 months ago

Jonathan, thanks for the pep talk. It was timely and helpful. I find it more difficult to think long term now that I’ve mostly retired. Not having a regular income to purchase assets at a discount is disconcerting, but I’m coming to grips with it!

Margaret Fallon
Margaret Fallon
5 months ago

Jonathan, thank you for putting things into perspective, we need these kind of articles during difficult market times. I read your columns during your days at the WSJ and enjoyed them, you always dug into a topic to get to the bottom of it more so than most of us would and I always appreciated that. Thank you for hosting this wonderful website. I’ve had many pleasurable hours reading the wonderful authors’ stories since it started.

Philip Stein
Philip Stein
5 months ago

Maybe it would be easier for us to maintain a long-term perspective if we focus on the number of shares we own instead of the current share price. In today’s market, every time we reinvest fund distributions or make additional investments, those dollars buy more shares than before. And more shares mean more dividend income — which is especially valuable for retirees.

David Powell
David Powell
5 months ago
Reply to  Philip Stein

This is exactly why I’m keen for another 20% drop. More shares now mean more dividend income when we need that.

SCao
SCao
5 months ago

Nice insights and thanks for the pep talk. Wish more people will listen (or read) to those. Thank you, Jonathan!

Chazooo
Chazooo
5 months ago

Is it really the “folks spending merrily” or Uncle Sugar hugely spending merrily that has given us a reported 8.6% inflation rate?
I agree it is too late to be selling so continue playing the long game as you suggest.

Jonathan Clements
Admin
Jonathan Clements
5 months ago
Reply to  Chazooo

Yes, the government handed out a bunch of money, which folks are then spending. But consumers are also flush with cash because anybody who wants a job can have one (even two), plus they saved a bunch of money by not spending during the early days of the pandemic.

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