(Bloomberg Opinion) -- If the U.S. stock market is giving you whiplash, you’re not alone.
Perhaps this sounds familiar: Your portfolio was sprightly when the year began, as U.S. stocks extended their stellar gains from 2019. Friends called to crow about their profits on Tesla’s surging stock, urging you to get in. You wondered if you had too little invested in the market.
Then the nightmare began. Stocks sold off sharply in late February on coronavirus fears. Your portfolio melted. Even the stocks you thought were a sure bet — Microsoft, Amazon and Google parent Alphabet — tumbled from their perch. On second thought, maybe you had too much invested in stocks.
You see where this is going. A month later, the market suddenly turned higher. Seemingly every stock shot up in late March, including shares of the airlines, cruise lines and casinos you thought were headed for bankruptcy. Now you wonder how you could have missed a historic buying opportunity.
Among the masses of tortured investors is renowned money manager Stanley Druckenmiller. The first ballot hall-of-famer has amassed a multibillion-dollar fortune by deftly navigating markets for decades, but not even he has been able to wrangle the market’s recent gyrations. He told the Economic Club of New York last month that “the risk-reward for equity is maybe as bad as I’ve seen it in my career.” Then, last week, he appeared to change his mind, telling CNBC that he’s been too cautious. “I was up 2% the day of the bottom, and I’ve made all of 3% in the 40% rally,” he said. “I missed a great opportunity.”
It’s not the first time Druckenmiller has been tossed around by an unruly market. He bet against internet stocks in February 1999 during the dot-com madness. A month later he had lost $600 million and his portfolio was down 15% on the year. So he started buying them instead and was up 35% by the end of the year. Encouraged by the easy money, Druckenmiller plowed an additional $6 billion into tech stocks in March 2000. The bubble burst just days later and he lost $3 billion. “I already knew that I wasn’t supposed to do that,” he recounted later. “I was just an emotional basket case and couldn’t help myself.”
The lesson is that no amount of intelligence, learning or experience is foolproof when the market is stormy. And by any measure, the market’s moves in recent months have been extraordinary. The S&P 500 Index plunged 34% from Feb. 19 to March 23. Since 1928, the first year for which daily prices are available, only the Great Crash in the fall of 1929 and the subsequent selloff in the fall of 1931 produced deeper losses over the same number of trading days. The ensuing run-up has been just as unusual. The S&P 500 surged 44% from March 23 to June 8. Only 1932 and 1933 produced larger gains over the same period.
And there may be more breathtaking swings on the way because Covid-19, the market’s chief nemesis, doesn’t appear to be going away. After trending down for weeks, the U.S. has experienced an uptick in new coronavirus cases in recent days. Treasury Secretary Steve Mnuchin told the Senate Small Business and Entrepreneurship Committee last week that more fiscal stimulus will be needed to support American businesses and families. Perhaps not coincidently, the S&P 500 dropped 6% last Thursday, the biggest one-day decline since March 16, and is down 5% since its recent peak on June 8. More ominously, the CBOE Volatility Index, or VIX, the most widely followed gauge of expected market volatility, is up roughly 50% since the beginning of last week.
So what to do? The best way to avoid big mistakes in a roiling market is simply to stick with your investment plan. For example, if you rebalance your portfolio to a predetermined mix of stocks and bonds once a year, as many investors do, leave it alone until the next rebalance and don’t look at it in the meantime. Watching the market’s hysterical and arbitrary daily fluctuations during a crisis does nothing for your portfolio — never mind your health. When the time comes, muster the courage to rebalance back to your target stock/bond mix. If the market is down, it will force you to buy more stocks at lower prices, which should provide a boost when the market eventually recovers.
And if you don’t yet have a plan, sit tight. You’re more likely to make a bad decision when the market is in turmoil. When things calm — yes, this bout of volatility will pass and probably sooner than you think — there will be plenty of time to formulate a plan ahead of the next crisis.
It also helps to keep an eye on the longer term. Anything can happen in the market in a day, week, month or even year. But over longer periods, the range of likely outcomes diminishes and the probability of a good outcome increases significantly. Since 1926, the worst one-year return for the S&P 500 was a negative 68% from July 1931 to June 1932, including dividends, and the best one-year return was 163% during the following 12 months. Over rolling 10-year periods, however, the worst return was negative 5% a year and the best was 21% a year. And over 20-year periods, the worst and best outcomes tightened further to 2% and 18% a year, respectively.
That’s why Wall Street firms often agree on the long-term outlook for the S&P 500, even as their price targets for any given year vary considerably. UBS, for instance, estimates that U.S. large-cap stocks will return 5.7% annually over the next several years, while JPMorgan pegs the number at 5.6%. In the near term, however, UBS estimates that the S&P 500 will close the year at 2,850, whereas JPMorgan sees it climbing nearly 20% higher to 3,400 during the first half of 2021, according to estimates tracked by Bloomberg.
But who cares what happens to stocks during the next year? There’s no way to know or control what the market will do in any given year, and most investors are in the market for years or decades. Those who manage to tune out the noise along the way are likely to have an easier and more enjoyable investing experience — and very likely fatter profits, too.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Nir Kaissar is a Bloomberg Opinion columnist covering the markets. He is the founder of Unison Advisors, an asset management firm. He has worked as a lawyer at Sullivan & Cromwell and a consultant at Ernst & Young.
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