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The “Market”

  |   Financial Planning, Investment Planning

With tax reform behind us, the “market” is on everyone’s mind. 

With the Dow Jones Industrial Average (“DJIA”) over 25,000 and the S&P 500 over 2,700, there is much debate about where the “market” goes from here.  (Note: the “market” is often defined as the DJIA or the S&P 500, although it is not always clear which “market” the author/commentator is referring to.)

Can it go up from here?  When should we expect the next correction?

Not surprisingly, some are predicting “the market” is headed for a correction, while others believe it has room for continued growth.  This CNBC Market Strategist Survey provides a summary of where Wall Street strategists think the S&P 500 will end 2018 and how their 2017 predictions fared.

We all know that predictions such as those referenced in the CNBC survey are just that.  We also know that data can be dissected, interpreted, and even manipulated in an attempt to support any argument.  To help put the 2017 DJIA performance in perspective, take a look at the chart below.

122 years of performance information

The “market’s” performance, whether defined by the Dow Jones Industrial Average or the S&P 500, was clearly good news for investors in 2017.  The chart below, which depicts 122 years of annual returns, shows that while last year’s performance was strong, it was not an outlier.For those of you not inclined to spend much time analyzing the data contained in the chart, below are a few interesting points:

  • Roughly 2/3 of the 122 years experienced positive annual returns ranging from 0.34% (ok – barely positive) in 1926 to 81.66% in 1915;
  • Roughly 1/3 of the 122 years experienced negative returns ranging from -0.42% (barely negative) in 1902 to -52.67% in 1931;
  • The most common percentage range was positive returns of 10% to 20% with 25 of the 122 years in this range (the 25 years spanned 1909 – 2016); and
  • 2017’s gain of 25.08% fell in the third most common percentage range (positive 20% to 30%). Of the 19 years before 2017 that fell in this range, the following year experienced negative returns 7 times and positive returns 12 times.

3 seemingly simply questions

You may be familiar with Richard Thaler, the University of Chicago professor who won the Nobel Prize in Economic Sciences in 2017 for his contributions to behavioral economics.   In Thaler’s book, Nudge, co-written with Cass Sunstein, he asks the reader to write down the first answer that comes to mind for a few questions. The purpose is to highlight the difference between answering questions based on your intuition or gut reaction (Automatic System) vs. your conscious thought (Reflective System).  Take a minute to read the questions below and write down your answers.

  • A bat and ball cost $1.10 in total. The bat costs $1.00 more than the ball.  How much does the ball cost?  ______ cents
  • If it takes 5 machines 5 minutes to make 5 widgets, how long would it take 100 machines to make 100 widgets? ______ minutes
  • In a lake, there is a patch of lily pads. Every day, the patch doubles in size.  If it takes 48 days for the patch to cover the entire lake, how long would it take for the patch to cover half of the lake?  ______ days

Why I am writing about the stock market performance and Richard Thaler in the same post?  Here’s why…We are inundated with information, and it is difficult to sort through it all and make decisions, especially on complicated topics (such as investing).  As a result, we often let our intuition take over, as it likely did for the above questions, and we miss the opportunity to think reflectively or seek out advice before making a decision.

If your decision to liquidate your portfolio, or invest 100% of your funds in the “market”, or stay 100% in cash is driven by gut reaction related to the market’s 2017 performance, the CNBC Market Strategist Survey, and/or a neighbor’s recommendations, before you take any action, activate your Reflective System.  Don’t let intuition or emotion dictate your investing strategy.  Seek out advice and information you trust, and as much as possible, make decisions based on deliberate thought and factual information.


Answers to the questions…

$0.05, 5 minutes, 47 days

AUTHOR - Tammy Wener

As co-founder of RW Financial Planning, Tammy oversees the financial planning process for all clients and manages the day-to-day operations of the firm. She truly enjoys getting to know her clients and is not shy about asking questions. Tammy has 15+ years of experience in the financial planning and estate planning fields and has worked with a broad range of clients including: couples simultaneously planning for financial independence, caring for their parents, and saving for college; newly widowed and divorced women looking to become more financially literate; young couples just starting out; families juggling the demands of a child with special needs; and financially independent individuals and couples exploring “what comes next.”