How to Navigate a Market Full of Extremes

This summer has been full of market extremes. Our current reality is that, because the market’s numbers have grown so large, a typical day with a move of 1% equals a nearly $250 billion shift. These massive swings happen because today’s total value of the S&P 500 rings in at about $25 trillion. (In 2009, it was “just” $8 trillion.)

In these volatile times, we routinely see the entire value of the U.S. stock market tilt by hundreds of billions of dollars in a matter of hours. But that doesn’t mean that on these days, U.S. corporations have necessarily lost hundreds of billions of dollars in intrinsic value. And daily stock market movements routinely under- and overestimate the true fundamentals of American business.

Let’s take a look at the numbers.

In its current revved-up state, the stock market tends to exacerbate how much things are changing. But with these gyrations come strong emotions for most investors.

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Patient investors understand that there’s a difference between volatility and loss. Take the Sage of Omaha, for example. During the crash of 1987, Warren Buffett “lost” $350 million — his stake in Berkshire Hathaway (BRK.A). During the Asian financial crisis, from July to August 1998, he “lost” $6.2 billion. And during the Great Recession and bear market of 2007-09, his net worth dropped by over $20 billion.

While BRK.A traded at $75K per share in 2009, today the price is close to $300,000 per share.

Now, you may think Buffett’s experience is irrelevant to “average investors.” After all, most of us aren’t billionaires. You may be thinking, “If I have $10 billion, and it dropped to $5 billion, I’d be fine too.”

But this lesson applies to us all. If the $200,000 you have socked away in your 401(k) drops to $150,000, it’s painful. To accumulate wealth, however, it’s critical to understand that these painful overall market losses have historically recovered with time.

Take away a few zeros from the billion-dollar Buffett example, and the math is the same. Where we mostly differ as investors is in how we control our emotions. Buffett understands that market swings aren’t necessarily indicative of what’s going on in America’s businesses.

Our emotions dictate our propensity to hold tight, and stay invested so that when positive returns come, we’re there to capture them. Those investors who have been able to stomach these tumults have reaped the greatest rewards from the market.

Still, it’s hard to believe these enormous numbers when the market drops just a few percentage points. A 2% fall in the U.S. stock market (roughly $500 billion) is equivalent to the total gross domestic product (GDP) of Sweden! A 2% U.S. market swing also trumps the GDPs of Ireland ($380 billion), Norway ($427 billion), and Austria ($457 billion).

While in one day, or even a few hours, we could see $500 billion or $750 billion worth of value either created or destroyed, let’s think about this for a minute. A $500 billion tilt is the amount of money 8.5 million average families in America make in aggregate for an entire year. This is found by taking $500 billion divided by the median family income in the U.S. of $59,039.

Look at investing over decades, not days.

As I’ve said before, time in the market beats timing the market.

And you don’t have to be wealthy from the start. Over the past few decades, I’ve seen many families who don’t make a ton of money invest prudently and amass a healthy retirement nest egg. They are patient and disciplined and stomach the twists and turns of the market by systematically saving, investing and adhering to a long-term plan.

So, when you read the headlines about billion-dollar dips in the stock market, don’t be scared out of your portfolio. Use the context provided here as a reality check. Your emotions will flare, no doubt. But don’t let them get the best of you.

Read original AJC article here

Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. The information contained in this piece is not considered investment advice or recommendation or an endorsement of any particular security. Further, the mention of any specific security is solely provided as an example for informational purposes only and should not be construed as a recommendation to buy or sell. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.