The Goddess Fortuna: A Reminder To Stay The Course

Ed Kerns |

As was the custom in ancient times, many of life’s happenings, especially those that couldn’t be explained, were often attributed to the gods. In ancient Rome, for instance, the Goddess Fortuna came to be identified with luck and chance.

Interestingly in the 1700s, Fortuna found her way into a Dutch pictorial called The Great Mirror of Folly. The book was largely a satirical collection of prints and different forms of commentary depicting speculators and the fates of “investors” from all walks of society as they reacted to the ups and downs of the stock market in 1720s England, France and the Netherlands.

One of the prints in the book depicted the goddess Fortuna floating above the masses of stock brokers and individual speculators, many with hands outstretched to the goddess and with others cowering in fear. I recall the first time this was brought to my attention and how it reminded me then, as well as now, that investor behavior doesn’t change much over time.

Think about the stock market’s volatility in the past few weeks and everyone’s reaction to it. In just two weeks we’ve gone from the Dow Jones having its worst day in history to stocks having their best week in years. Reports of an impending recession, runaway inflation, rogue trading algorithms or the market correction to end all market corrections were often given as reasons and warnings by pundits and financial journalists.

I understand the need to know cause and effect. It’s natural. I also get how trite it can sound when every financial news story is reported as if it’s the end of the world all the while financial planners like me say ignore the noise and stay the course.

Even if you have an appreciation for the fact that markets fluctuate, I often find that a certain question is what’s really on an investor’s mind - “Should I react to the volatility?”

To answer that, let’s first look at what market history tells us going back to 1979¹:

  • The average intra-year decline of the US stock market has been about 14%.
  • About half of the years during this period had declines of more than 10%.
  • About a third of the years had declines of more than 15%.
  • Despite significant intra-year drops, 33 out of 39 years had positive returns.

Clearly this goes to show how difficult it can be to say that a large intra-year decline will turn into a year of negative returns.

Trying to time, or react, to ups and downs is equally difficult. The Great Mirror of Folly and its illustrations with images like Fortuna provide as much of a mirror for investors today as it did 300 years ago. A mirror revealing the foolish reactions of investors falling prey to greed, fear and regret. The same things that derail long-term financial plans today. Foolish in the sense that reacting to volatility is speculating, not investing.

Here’s something that further complicates matters when it comes to reacting to markets. A substantial proportion of the total return of stocks over long periods comes from just a handful of days. Investors are unlikely to be able to identify in advance which days will have strong returns and which will not. The best course of action being to remain invested during periods of volatility.

To help illustrate this point, the exhibit below shows the annualized compounded return of the S&P 500 Index from October 1989 to December 2016 and illustrates the impact of missing out on just a few days of strong returns. The bars represent the hypothetical growth of $1,000 over this period and show what happened if you missed the best day or handful of best single days during this time. The data shows that being on the sidelines for only a few of the best single days in the market would have resulted in substantially lower returns than what the period had to offer.

Reacting Can Hurt Performance

In conclusion, markets are volatile and uncertain in the short-term. If they weren’t, there’d be no expectation of receiving a return on our investment to compensate us for this risk. Trying to react to volatility by changing investment strategies because of short-term fluctuations will likely prove to be harmful to your long-term success.

Staying the course isn’t a trite statement. In fact, for those who have a well-thought-out investment plan it’s good advice. If you don’t, I guess there’s always the goddess Fortuna.

¹ Recent Market Volatility, Dimensional Fund Advisors – February 2018

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