By: Matt Garrott
It’s been over a year since the S&P hit its all-time high. The market has been going sideways. From February 16th, 2015 through May 31st, 2016, the S&P 500 has returned 0%. Investors have earned nothing. Or have they?
While the market returned “0%” from point to point, savvy investors took advantage of two 10%+ dips by the S&P 500, one in August of 2015 and the other in February of 2016. There was no need to pick individual stocks or sectors. There was no need to count oil rigs, follow dry bulk rates, or parse the latest Federal Reserve meeting minutes. Investors only needed to stick with their plan. Those who contributed to their 401(k)s or rebalanced during the dips ended up buying low. Investors who harvested losses banked an asset that gives them more control of their taxes in the future.
Hearing a stock market return of 0% over ANY time period triggers dissatisfaction whether the portfolio actually earned that 0% or not. This is another way our brains and marketers trick us. We think of binary decisions with binary outcomes. It is difficult to make choices that encompass more than yes/no. Consider what happens when asking your significant other where they want to eat. There are so many factors that “I don’t know, where do you want to eat?” gets volleyed back and forth until both parties are exasperated.
A binary decision is easier for us as humans to handle – “Do you want to eat at Burger Shack or Dairy Barn?” Clever marketers present us with a problem such as a flat market. They then present us with the “perfect” solution – their product. Investors who accept the marketer’s illusion often end up chasing returns as they are sold on the investment of the month. Being able to see through this false decision tree where the marketer has whittled down the choices is vital to avoid damaging investment mistakes. That is why having a financial plan is crucial to investing success. It helps remove some of the noise in the markets, facilitating cleaner decision making and more positive outcomes.
One other small detail in the 0% return narrative: The S&P 500 returned 0% only if you don’t count dividends. With dividends, the index returned just over 2%. This does not seem like much, but it’s an important distinction as investors generally get those dividends while newsdesks report on the S&P 500 in relation to its all-time high price which is not a meaningful benchmark for serious investors.
