I was sitting in a client meeting yesterday, mentally readying to deliver my part of the pitch, when I heard one of my colleagues say the following:
“And with that, the S&P 500 is now up 22% year to date”
Whoa? Are you serious? When did that happen?
After all, it seems that for the past 12 months it has been nothing but bad news. Trump, trade war with China, Brexit, negative interest rates, Corbyn, Russia, global growth worries, Trump again, economic slowdown, UK election… the list just doesn’t end.
And yet, mysteriously, a quick glance at the phone proved my colleague was right. The S&P 500 closed at 3,078 yesterday. On January 2nd, it stood at 2,510. In just over 11 months, it grew by 22.6%.
Of course, as the more astute readers of this blog will know, that is only part of the story. Simply comparing price levels at discrete points in time ignores the other big driver of shareholder returns – dividends.
The companies that constitute the S&P 500 happen to pay dividends. And in the first 10 months of 2018, those dividends have added up another 2% of return to the investors in an S&P 500 index tracker. You can see the impact by taking a look at the total return index below:
Total return year to date? 24.6%
I suppose those of us who were caught off guard (myself included) can be forgiven. After all, we would have no idea the stock market was doing so well if we believed all the newspaper headlines throughout the year.
As an aside, I have long ago realized reading the news (and stock market news in particular) is a near-complete waste of time.
Unfortunately, clients typically expect an M&A banker to be clued in on the latest developments. So I do end up checking the FT regularly – and oh boy, the picture isn’t pretty.
Just take a look at the headlines that have been dominating the news flow over the past 12 months:
You read that right. Out of nine headlines, one is positive. Two are neutral. And six just make you want to run back home, jump into bed and hide underneath the covers.
And unfortunately, there is a very simple reason for the massive dichotomy between reality and the picture painted by the media:
Fear sells products. Fear sells services. And fear sells advertising.
I’ll even bet that fear could have played a role in you clicking on the title of this post instead of simply getting on with your Tuesday morning (yes, the choice of words was intentionally misleading).
As much as I love and respect the FT, they’ve got expenses to cover, journalists to pay and profits to generate for their shareholders. For that, they need readers.
And it happens to be much easier to elicit a reaction (i.e. a click) from those readers when you play on their fears. Somehow, making us feel good about ourselves just doesn’t elicit the same visceral reaction.
So should you worry about this new stock market record? Of course not. You shouldn’t even care about it. And neither you should be distracted by any kind of stock market news going forward – regardless of whether they are good, bad or neutral.
On your long, winding road to financial independence you will come across many more exhilarating records – and more than a few painful troughs. They should have zero bearing on your investment strategy, decision making and emotional well-being.
Remember – staying the course is the only guaranteed way to win in the stock markets. Everything else is nothing but a harmful distraction.
Don’t worry. Be happy. Invest wisely.
About Banker On Fire
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Banker On FIRE is an M&A (mergers and acquisitions) investment banker. I am passionate about capital markets, behavioural economics, financial independence, and living the best life possible.
Find out more about me and this blog here.
If you are new to investing, here is a good place to start.
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