Riding out the Storm

This is my daughter Melanie:


While she may look pleasant and mild mannered, don’t let that fool you.  She turned twelve this year, and it seems we have entered the growing, changing (read: hormonal) phase of life.  Melanie’s mood can change lightening fast.  Here is a chart of her moods on a very typical day last week:

For those of you who have parented or lived with a teenage girl, please call me and let me know your secrets of survival.  For those of you that have never experienced the emotional whipsaw of a teenage girl, it is very similar to the recent stock market movement—wildly up one day, wildly down another.  Actually, the chart above is not just a typical day for Melanie, it is actually the past month performance of the S&P 500.

As Nathan has written about recently, a wild ride in the stock market is not fun to live with.  However, rather than live in fear, good investors courageously maintain their composure and stay focused on the long-term.  Once of my favorite economists, Dr. David Kelly of J.P. Morgan Funds, often says: “The key to successful investing is not predicting the future, but looking at the present with clarity.”

I love that idea—it is simply impossible to know the future, but we are able to examine our current environment and make prudent plans based on what we see.  What we see now is that the US and global economies are still growing, corporate earnings remain strong, unemployment is low, and valuations of all asset classes are much less elevated than they have been.  Current economic evidence appears to point to continued but slowing growth as we near the end of this cycle.

And, as is typical at the end of a market cycle, small market pullbacks are normal.  According to research by JP Morgan, the stock market has fallen over 5% about four times a year on average.  Declines of two or three percent happen even more frequently, but recovery time is short as well:

Unfortunately for all of us, just like Melanie’s wild mood swings, market pullbacks are a normal occurrence, but the good news is that both tend to be relatively short lived (although unpleasant at the time!!)  A healthy dose of long-term perspective and patience help to get through both…

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