Last week was a rough week for the stock market. After declines beginning Tuesday of the previous week, on Monday 8/24/15 the Dow Jones average took a frightening nosedive at the open, initially falling over 1,000 points before closing down a "mere" 588.40 points.
Of course, this generated lots of headlines. The markets continued to rise and fall in wild, breathtaking motion through Wednesday of the week before mounting a sustained 2-day rally by Friday's close.
Using the broader S&P 500 Index as a gauge, here's a visual look at the week, extending slightly back into the previous week to make the decline appear even more dramatic (please note that you can click on any of the pictures to enlarge):
Now, that red line looks pretty horrible, doesn't it? This, of course, led to lots of panicked calls to financial advisors from clients fretting about the state of their portfolios, as well as newscasters conducting breathless on-air interviews on the evening news.
They say "a picture is worth a thousand words." To help calm your nerves, instead of writing 3,000 words, perhaps I can share 3 simple pictures. In each picture, the "good" outcome will be featured with a green line, the "bad, world is ending" outcome with a red line.
First, here's how the last year looked:
The green line looks pretty good, the red line not so good. And it's true. With the losses of the past week, the S&P 500 is pretty much flat over the past year. Of course, if you were invested in a solid ETF such as SPY, you would have received dividends over that span and as a result would be slightly in the green, so to speak, overall.
Next, though, let's take a slightly longer perspective. This one is 3 years:
Ah, that looks a little better. The red line is not quite as sweet as the green, but both look pretty decent. Finally, let's take it out to 5 years, and it looks even better:
Here's the deal. The U.S. market has been up pretty sharply over the last 3 years, and even more over the last 5 years. There is a major school of thought that says the market has been up a little too sharply, buoyed by near-zero interest rates.
Essentially, the gap between the green and the red lines is just a little bit of air, a little bit of excess, being let out of the market. Still, with both the 3-year and 5-year charts, even the red line looks pretty good, wouldn't you agree?
My point? If you, like me, have a balanced portfolio, a long-term perspective, and a little cash, short-term havoc such as happened last can offer a wonderful opportunity to add to your portfolio.
Now, the line for the next five years may not look quite as good as for the last five. There are challenges ahead, including a slowing global economy. At the same time, if we revisit this topic 5 years from now, there is a very high probability the line will also be moving in an upwards direction.
I hope these pictures have been helpful in keeping an eye on, pardon the pun, the big picture. Be smart, diversify in low-cost ETFs, and I hope both of us have a big smile on our face five years from now.
Happy investing!
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Disclosure: I am not a registered investment advisor or broker/dealer. Readers are cautioned that the material contained herein should be used solely for informational purposes, and are encouraged to consult with their financial and/or tax advisor respecting the applicability of this information to their personal circumstances. Investing involves risk, including the loss of principal. Readers are solely responsible for their own investment decisions.
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