My four-year-old daughter has a nasty habit right now of gritting her teeth and running up to her two-year-old brother in order to yank his nose or poke him in the eye. You know, just for the heck of it. This makes her somewhat "high maintenance" -- my wife and I rarely leave the two alone (and consequently, they rarely leave the two of us alone). Of course, we always make a point of sitting her down and telling her that this is wrong, and getting her to apologize. Which she does. But these scenes repeat themselves frequently enough that my son is no longer satisfied by her apologies. Would you be?
"Sorry, Gabe," my daughter says.
"No sorry!" says Gabe.
He's angry. Having your eye poked time and again by your older sister, only to receive a short apology after each episode, is inherently unsatisfying. No justice. "No sorry!" says Gabe, his baby-smooth face screwed up angrily, looking like he's been robbed or defrauded.
You might be feeling the same way about your investment portfolio right now. Here's how ours has done in the past four weeks:
A little worse each week, ending with a humdinger that finished off a 16.4% drop over the last month. That's about $75,000 gone -- poof.
"No sorry!" one wants to say to Mr. Market. It seems unjust, doesn't it?
And yet there's every bit of justice in it... or none at all. There's every bit because this steep drop has only brought the Nasdaq's six-year return down to 15% annually. Sorry, but there's every bit of justice in that. Are you spoiled? Unspoil yourself.
On the other hand, there's no justice in it. What has changed so much about the world today that makes it that much different from a year ago? A year ago, our portfolio was up over 1,500% in less than six years. Today, as the smoke clears, we find our gains just 650%. (And we're the lucky ones! We've always acknowledged luck as a key element in our performance. Many people with less luck are not up right now, but down, right along with the market.) Anyway, that's 850 percentage points of winning that's evaporated before our eyes, in between paychecks. The very stocks that have helped us most to our stellar returns, AOL Time Warner (NYSE: AOL) and Amazon.com (Nasdaq: AMZN), are two of the three stocks that lost the most cash value in the last year.
We always ask: Why did you buy in the first place? With money we won't need for at least five years (preferably five decades), we invested in stocks for the long term. So when we go back and reexamine our reasoning, we find it completely unchanged. Stocks have been the best investment over this century, and we expect the same to be the case for the next century. That's DESPITE all the days like today, which are always unusual, but never so unusual that they don't recur every several years. Even DESPITE days like today, or months like this month, stocks are the best long-term investment. Our original reasoning for investing is therefore unchanged: Is yours? These are the questions that help you answer how you should treat days like these.
OK, so if the market dropped another 20% tomorrow, does that put you out? If you've been listening to The Motley Fool, it shouldn't. You're putting money away that you won't need anytime soon, you are NOT on margin in any significant way, and you probably like your companies just as much as you did yesterday, even if the broad market has now devalued them. You're looking forward to that next paycheck, because you'll still be socking away 5% to 10% of that into your 401(k) or IRA or brokerage account, at a substantially cheaper price. That's Foolish.
That's not to say that we at Fool HQ or anyone treats significant drops with blithe indifference. Psychologists tell us that the pain of loss is three times the joy of gain. Look again at our last five days. OUCH! But for anyone who's living the Foolish long-term investment approach, it's very very hard to have shown any losses. Take the index fund, which is one of the first steps to investing Foolishly. Index funds have scored amazing 15%+ gains in the last five- and ten-year periods. Of course, those who bought into an S&P index in the last two years see numbers in the red. I certainly pity these people, as it's hard to start your first years as an investor in the face of a big drop. And yet my pity doesn't run too deep, because if they're investing Foolishly they're concentrated on years and decades, not today or last month.
Indeed, if strong American technology and consumer companies -- which every day get a bit closer to dominating the world economy -- don't do well over the next 25 years, nothing much will. I'm cool with that. I can't predict where it'll all go over any period, but I do know that I'm invested about as best I can right now.
To close, every discretionary dollar I have is invested in the stock market, as true of today as it will be for tomorrow as it was for yesterday. I've invested for 17 years, and over that time the stock market has rewarded American equities investors very well. More importantly, our collective knowledge of market history runs far longer than 17 years, so that we can all see how rewarding stocks can be when held over a lifetime. Thus, I plan to remain invested in most of the same companies -- the very ones you see in this portfolio -- for at least the next 17 years as well. And yet these gains have not come without suffering! The stock market dropped 23% on a day in 1987 that I remember pretty well, and in October of 1997, the Dow dropped 7.2%.
If you come to this space to be reminded of these things, then I'm glad I'm able to help you out. But do consider that if you're having to come to this space to remind yourself of these things, you're not yet as self-sufficient an investor as we think you should be. We're here to help, whether it's through our Fool's School area, through our discussion boards, or through scribblings like this one. We're here to teach, and (as usual) we learn more than we teach. It's as true of investing as it is of parenting.
David Gardner is co-founder of The Motley Fool. He currently owns AOL Time Warner and Amazon.com. For a complete list of his holdings, see his profile. The Motley Fool is investors writing for investors.