For long-term investors, a key to success is knowing how to take the good days with the bad. In this video clip from “The 5,” recorded on Sept. 24, Fool.com contributors Brian Withers, Demitri Kalogeropoulos, Neil Patel, and Jason Hall share their strategies for thinking about their own portfolios when the market is down.
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Brian Withers: The S&P over the last decade up 380 percent. Really stellar, no matter how the market did today over the last 10 years, it’s done super well. Demitri and Neil are going to stay on and Jason adds to the fun. I’m going to start out with the lead here yesterday, and I love how the financial media does this, yesterday was the best day for the S&P 500 since July. Well, OK. [laughs] The market was up 1.2 percent, the S&P 500 was up 1.2 percent. But today I looked at it, it was floating around zero. But tech stocks and some of our Fool favorites seem to be taking it on the chin over the past week or so. A number of days, I would open my portfolio and I would see nothing but stocks in red numbers. At least for the daily change, not for the long term, but for the daily. I’m wondering if some of our members are feeling this too. The question for you guys is, are you seeing similar trends? How do you deal with it on days or stretches of days where you’re seeing red numbers, do you worry? How do you deal with the volatility? Demitri, we’ll hit you up first.
Demitri Kalogeropoulos: Sure, yeah. It’s a great question. I’ll start off by saying down days are not as fun [laughs] as the up days for sure. It’s just psychology. I guess I think of it this way that volatility is the price we pay for superior returns. It’s the price of admission. S&P 500 has averaged, I was looking at an article actually written by Jason Hall that highlighted a few of these numbers, it’s up about 14 percent annually over the last decade. They call that the average return over the last 10 years, which is way better obviously when you could get in your bank account or in CDs, or bonds, or real estate in most cases.
But to get those better returns, I think we’ve had to sit through a lot of painful dips, and sometimes those last for weeks, like they did last year, sometimes they last four months, sometimes they last for a year. Even in this unusually great 10-year stretch, out of those 10 calendar years, we had three of those years, we were below that 14 percent average, and three were below five percent. Then, of course, like I said, if we zoom in a little bit, we’ve also had to sit through that, I think the S&P dove about 20 percent in just a couple of days in the first phase of the pandemic.
As an investor, I think about what I’m signing up for. Basically, I’m signing up for that volatility that’s at least as bad as the index, but probably a bit worse because I own a lot of individual stocks were just talking about that. Individual stocks, by definition, are going to move more than the market itself, so I have a very real chance. This is the contract, basically. I have a good chance of losing money over the short-term in say, a year or two, and that’s short-term. But I have really good odds of earning solid returns over three years, five years, 10 years. I don’t think we’ve ever had a 10-year period of losses. Another great reason why you shouldn’t really put money into the market that you are going to need in the next six months or the next year it’s this is money for three years, five years, 10 years, 20 years retirement stuff. If you take that approach, the six-month decline is not going to bother you as much.
Neil Patel: Yeah, I agree with a lot of what Demitri said. To echo what he just said, volatility, that’s the admission to get market-beating returns. You have to be able to stomach the day-to-day, the month-to-month, even the year-to-year ups and downs. Something that I do, I don’t really check my positions first thing in the morning or whatever. I look at them once throughout the day and I think that shields me from overreacting to any bad news that’s going on. One Ben Graham quote that I really like, for those not familiar, he was just called the father of value in investing and was Warren Buffett’s teacher, I think at Columbia. He says in the short-term, the market’s a voting machine and in the long-term, it’s a weighing machine. Brian, like you said, I think it’s funny when news outlets, they’ll say, the markets had its best day since it rained on a Tuesday last year or something [laughs] like that.
Patel: I think the thing that keeps me levelheaded, especially when there’s a 24-7 news cycle of these days. It’s just knowing that the fact that you’re investing in the stock market is a good sign. This is the best long-term generational wealth-building tool we have. You’re not going to make money selling in and out frequently, it’s to stick with it long term. Stocks are going to do what they do day-to-day, week-to-week. It’s just focusing on the long-term, focusing on what your goals are. Staying away from the noise, that will help you achieve your returns that you’re trying to look for.
Jason Hall: Yeah, my portfolio has become very uncorrelant, but it’s certainly far more volatile than the market. Today, my portfolio fell 0.6 percent, which is a pretty significant decline, particularly on a day when the market was relatively flattish. I didn’t look at it exactly at close. But then the flip side of that is, I’ve absolutely out-performed the market over the long-term and by a pretty significant margin, even with a large, broad portfolio, which I think is interesting because it’s actually part of how I get through these periods of volatility is unlike Brian and Demitri. I’m not sure about use for us how concentrated your portfolio is, but for me, I feel pretty confident that I could own maybe even 200 individual stocks and still outperform the market and not be concerned that I’m potentially watering down my returns because one thing I just think about the Foolish universe.
There are several hundred stocks that have been recommended across various portfolios and various stock-picking services at The Motley Fool and the results don’t lie, you look at the numbers. That helps me. I think that’s so pretty concentrated compared to the thousands of stocks that we have available to buy. Here’s the big realization I have come to, and this is recently. I think about the market each day. Whatever moves it makes is what other people are deciding to do with their money. Demitri, you talked about stocks is being great 3, 5, 10, 20, 50 years out, is those things. I’m not going to make my decisions about my money, my stocks based on what other people are deciding to do with their money. That’s [laughs] not a very good way to manage your money. For me, I think about it that way. It’s also a good way I think, to have the right framework in mind for that near-term money. [laughs] It’s right there in the volatility, don’t have it in stocks. That helps me just thinking about it that way.
Patel: Yeah, Jason. Just to quickly add like you talked about. Investing, I look at it like an arena or a football field where everybody’s in the same arena but everyone is playing a different game. You can’t judge somebody who’s selling a stock or buying a stock, their time horizon might be the end of the day, and they’re getting out of the stock or buying or whatever. Like you said, the biggest thing is to just know what your goals are and don’t be influenced by the outside people, because that’s very easy to do with human behavior and herd mentality and that kind of thing.
Hall: Yeah, I love that.
Kalogeropoulos: That’s a good point. I would just add one thing to also on this topic. If my portfolio drops two percent and I lose sleep over that, that’s good information for me to have. Because it’s telling me I’m probably too expose personally, that’s not a thing. If I’m losing sleep per weeks or worried about what’s going to happen if the market drops four percent or five percent, I guess potentially I’m exposing myself to something I’m not comfortable with. Personally, I feel like I have a long investing horizon, so three percent, five percent, those numbers don’t freak me out. But it is good information to know. If that continues to happen to you, if you’re experiencing that stressful anxiety over a couple of percentage points, maybe you need to think about diversifying a bit more and maybe you want to buy some more index funds or exposure that way. Yeah, exactly. [laughs]
Withers: Yeah, Jason, you mentioned yours was down what? A half percent?
Hall: Point six.
Withers: Point six?
Withers: I can double that. I’m down with 1.1 percent today.
Hall: [laughs] I beat you.
Withers: Well, I am not surprised.
Hall: Well, right. You understand the nature of what you own, right?
Withers: Right. I imagine on down tech days, I’m going to be down, way more than you.
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