EC Don’t Do Something…Just Stand There!

Like a full plane hitting a rough patch of turbulence, investors have been shaken by the recent price volatility in the stock market over concerns of a slowing Chinese economy, plummeting oil prices, and a host of other alarming headlines. As a result, investors are left picking up the pieces of the S&P 500 decline, which currently sits off -11% from its 2015 highs (down -15% at the 1/20/16 low). The picture looks even uglier if you consider the Russell 2000 small cap index, which has collapsed -21% from its 2015 highs (-26% at the 1/20/16 low).

What now, and what does this mean? There has been all kinds of crazy technical trading activity occurring around heavy options expirations, stop-loss selling, and short cover buying. With all the frenetic gyrations in the stock market (e.g., 2,000 point swing in the Dow Jones over the last month), there have been no shortage of opinions on TV, on the internet or at the watercooler. However, the best sage advice probably came from 86-year-old investor legend, John “Jack” Bogle (founder of Vanguard Group – $3.4 trillion in assets under management at 12/31/15), who emphatically told investors to “Don’t do something…just stand there!”

The advice to “stay the course” can be very counter-intuitive to human nature. In periods of stress, our brains tend to revert back to our ancestors’ Darwinian survival instincts, which tell us to flee from the ferocious lion (see also Controlling the Investment Lizard Brain). The fact is these periods of turbulence are normal – no different than a bumpy flight into San Francisco. In fact, we’ve hit quite a few choppy air pockets in recent years:

Through all of this mayhem, including the current 2016 dip, the stock market has still managed to rise an impressive  +77% since the 2011 pullback, which sure beats the sub-1% yield earned on bank CDs.