As Seen In:

How Terrible a Year It Was Going to Be: An Investing Lesson From the 2016 Stock Market

Written by Ed Snyder on .

stock market chart

Google "January 2016 stock market" and you'll find articles using words like jitters, fears, crash, turbulence, plunge, horrible, worst. It's been 11 months and a lot has happened since then so you may not remember that the stock market had a rough January this year. One article stated "The Stock Market Posted the Worst January since 2009".

So just how awful was it? The S&P 500 finished January down 4.96%. The S&P 500 is an index of 500 large stocks commonly referenced to represent the stock market. There are many other types of stocks too though that are not represented by the S&P 500. That's a whole different article. Let's run through a few to see how they did in January. Small growth stocks, (Russell 2000 Growth Index) were down a whopping 10.83% in January.  Small cap value (Russell 2000 Value) was down 6.72%, International stocks (MSCI EAFE NR USD Index) returned -7.23% for January, real estate stocks (DJ US Select REIT Index) were down 3.95% to start the year and bonds (BBg Barclay US Agg Bond Index) ended January up 1.38%. Bonds were the best performer in January, outperforming the eight stock asset classes we use.

Given the above-mentioned numbers to start off the year you can imagine why there was no shortage of financial journalists and experts that wrote articles and made predictions that included many horrible things and reasons smart investors should be cautious or exit the market. As a financial planner I take a long term view of things. People's goals are usually long term – they aren't usually planning and investing for later in the year or for the next summer. My job, in fact, is to help them ignore this short term noise and teach them that it is inconsequential to the achievement of their long term financial goals. Ignoring the short term market and/or economic predictions being heaved at them left and right on a daily – no hourly - basis is one of the most important factors in successful long term investing. While my focus is long term, people who write about and make predictions about the stock market or economy, on the other hand, have a shorter term perspective and a different purpose.

This type of mentality, where the market starts off the year bad and many experts project from that, that the remainder of the year will be bad, if not worse, points to the recency bias so often prevalent in the financial media and with investors. People think what has happened recently will continue into the near future, whether good or bad. You should not be making decisions on how to invest your 401(k) or IRA or anything else based on what the market did last month or last quarter. You shouldn't be getting out of the market or "sitting on the sidelines" trying to time the market. In reality, when it comes to the markets and investing, you just never know. The beauty is that if you're a long term investor you don't have to know. So why waste time trying to figure it out. So far no one has.

From that turbulent, jittery, horrible January much has happened. Remember the stock market that had its worst January since 2009? The S&P 500 is up 13.07% year-to-date through December 19th. Here's where those other indexes stand year-to-date as of December 19th. Small growth stocks have gained 12.80%, small cap value is up 32.62%, international up 0.37%, real estate has gained 5.96%, bonds are up 1.84%. So although "The Stock Market Posted the Worst January since 2009" provided an attention-grabbing title for an article, that's about all that it was. It was not predictive of the rest of 2016.

The point is that markets gyrate all the time. They are not predictable. But that's okay. We don't have to be able to predict them to be successful investors. We just have to behave appropriately.

Index data source: Morningstar