Have A Plan & Pack A Coat

“You must wait at least 30 minutes to acclimate before going further.” So after an hour’s drive from an 80-degree beach, a 30-minute wait, and after answering a series of questions: no, we had not been scuba diving recently, and yes, we were in a four-wheel-drive car with a full tank of gas, we continued to ascend the mountain.

This picture is taken at the top of Mauna Kea. You are probably not surprised that the summit sits at 13,796 feet. You might, however, be surprised that Mauna Kea is located on the Big Island of Hawaii.

I visited the Big Island in January when its average low temperature is 68 degrees Fahrenheit, and its average high temperature is 82 degrees Fahrenheit. We all conceptually understand averages, defined as a single value that summarizes or represents the general significance of a set of unequal values. However, when I think of the average temperature in Hawaii, I think of the 80-degree day on the beach, not the outliers, such as the 28-degree day on Mauna Kea.

Most of us are similar in thinking about investment returns – we know the average is positive, but the inevitable outliers tend to surprise us.

Since 1926, the S&P 500 has experienced 18 bear markets (a fall of at least 20% from a previous peak). The average length of these bear markets is ten months, and the declines ranged anywhere from -21% to -80%.

In the same time period, the S&P 500 experienced 18 bull markets (a gain of at least 20% from a previous trough). Eighteen bear markets and eighteen bull markets are where the similarities end: the average length of these bull markets is 55 months, with gains ranging from 21% to 936%.

There will always be outliers, and the stock market’s ups and downs will continue to be unpredictable, and anything but steady gains year after year. But history supports an expectation of positive returns over the long term. Understanding the range of outcomes you can and will experience investing will help you be a good investor.

As is true in many areas of life, focusing on what you can control is essential. You cannot control the next headline-worthy event. You can control the level of risk you are taking on, how you are doing so, and your plan to make adjustments in the short term and the long term. This is part of the planning we do with clients – if we work with you, please know we do not take this lightly.

Morgan Housel, the author of the bestselling book The Psychology of Money, said, “A lot of finance consists of very educated people being shocked when something that’s consistently happened for hundreds of years happens again.”

As shocking as future outliers will inevitably be, my hope is that this article provides perspective for the surprising times to come. There is a reason we invest, just as there is a reason Hawaii is known as paradise. Invest, go to Hawaii – but have a plan and pack a coat.