Why You Should Stop Worrying About The Markets

Why You Should Stop Worrying About The Markets

Matt Egan from CNN Money wrote a piece about Warren Buffett yesterday titled “Warren Buffett: Dow will hit 1 million in 100 years“.

First, let’s get over the shock factor.  Yes, the Oracle of Omaha said the Dow will hit 1,000,000 in 100 years.  For perspective, the Dow closed yesterday (9/20/17) at 22,412.59.

He has always been very optimistic about the future of business in America.  But, is this a crazy prediction?

Egan notes:

To get to 1 million, the Dow would have to skyrocket 4,500% from here. But it would have 100 years to get there. The compound annual return would only need to be 3.87%. That sounds doable considering that the Dow sported a 10.7% rate of return between the end of 2008 and last year.

But the bull market that has occurred since the financial crisis of ’07-’09 has been extremely good.  What if we go back a little further?

Antoine Gara of Forbes noted the following:

Buffett pointed out that the Dow Jones Industrial Average traded for about $81 when Forbes was first published in September 1917. The index has risen over 275-fold in the ensuing century (an average of about 5.8% annually, or 10% when including dividends), thus “being short America has been a loser’s game,” said Buffett. “I predict to you it will continue to be a loser’s game,” he added, offering a forecast that the Dow will trade to 1,000,000 in the next hundred years.

So, if the market returns are even remotely close to what they’ve been returning over the past few decades, Dow 1 million will likely happen much sooner than 100 years.

What does this have to do with today?  I hear so many investors (young and mature alike) talk about their fears regarding the markets and so they stand on the sidelines, get overly conservative and/or watch their portfolios like a hawk.

Investors today are so well connected to the world that hearing market news is inevitable.  Is it helpful though?

The media only covers the short-term fluctuations of the markets that don’t actually matter to your long-term goals.

What’s going to happen with Korea, Trump, recent natural disasters, the Fed and on and on they go.  It’s a never-ending cycle.

If they simply said to put your money into a well thought out portfolio, fund the account based on what your goals call for, and ignore the noise, they wouldn’t have any advertisers. So, covering short-term fluctuations is a business plan, not an investor’s friend.

Let’s take a look back.

Forget about 100 years ago for a second.  What has happened over the past 30 years?

Why 30 years?  30 years represents the remaining years that the oldest Millennials have until traditional retirement ages and the average length of retirement for a Boomer retiring at age 62.  (The average joint life expectancy for a non-smoking couple retiring at 62 is age 92.)

Anyhow, on September 21, 1987, the Dow closed at 2,492.82.  (Reminder: It closed at 22,412.59 yesterday.)  Interestingly enough, what would occur over the month that followed that closing price, would create fear, havoc and break market records.

On October 16, 1987, the Dow would fall by more than 100 points for the first time.

Just three days later, on Black Monday – October 19, 1987, the market would fall an astonishing 508 points or 22.6% in ONE DAY!  Can you just imagine what that would look like in today’s world?

For the market to fall 22.6% today, it would have to fall by more than 5,000 points!  While I certainly don’t want to see it (I’m not sure it could ever happen again anyway in one day simply because the government would most likely step in), but can you imagine how the media would react to this?

It would most certainly be advertised as the end of the world, no?

Why is this important to think about as we continue to hear about how overvalued the market is?

Because despite the madness that ensued for a short period of time late in 1987, 30 years later, the market is up about 10x not including dividends.  30 years from now, the oldest millennials (that’s me) will reach age 65.

Long story short, could anything that happens in the markets right now be of any importance to your long-term retirement and legacy goals?

I’m not saying you should be ignorant about the markets.  I wouldn’t spend my time writing these things if I was hoping for ignorance.

In any case, if Buffett is right, and we have look at the next 30 years, the Dow would be in the ballpark of 100,000.  And that’s only assuming a 5% price return (rather than the 5.8% of the prior century).  Again, this does NOT include dividends that make up a significant chunk of investor returns.

There will be pullbacks (sometimes significant).

Prepare yourself emotionally to deal with it now, while the market is doing well.  I, nor anyone else, has any idea when or how deep the next decline will be.

Part of preparing yourself for bear markets is just knowing they are coming.  It’s been a long time since we’ve had a bear market.  So, many people have forgotten how it feels to see 20+% of the value of their portfolio evaporate.

Start planning now.  Remember to exercise discipline and patience through all market environments.  And maybe above all, have faith in the markets.  It’s certainly served Mr. Buffett quite well.

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