Rory suggested I join him training Jiu Jitsu about a year and a half ago. I liked the idea of becoming proficient in a martial art. Of being able to handle myself. And I’ve seen the John Wick movies. Who doesn’t want to be more like John Wick? Like any other man, especially one in his late-20s, I showed up at the gym with him one afternoon for my first class. I was a little overconfident. A bit more so after walking in. Turns out I was the biggest guy in the class. By a pretty wide margin. And one of the younger ones too. This shouldn’t be too bad.
There are lessons in humility and then there’s your first Jiu Jitsu class.
I was bigger, stronger, and younger than just about everyone in there. And they wiped the floor with me. I was hooked.
I’m a year and a half in now. Far from proficient. But a lot better than I was when I started. Jiu Jitsu is like anything that requires a high level of skill – the more you learn the more you realize you don’t know. The other day I managed to get a dominant position when rolling with a brown belt (one level away from the top level – black). I “took his back” in Jiu Jitsu jargon. I was rather excited. Time to submit him with a rear naked choke…
Then my ankle erupted in pain.
It turns out when you have someone’s back the one thing you must not do is cross your ankles. Doing so creates an opportunity for your opponent to put you in an ankle lock. Ankle locks end the fight. They hurt. I don’t cross my ankles when I get that position anymore. Lesson learned.
I would like to become proficient in Jiu Jitsu without the pain. It’s only been a year and a half, and I’ve been ankle locked, choked out more times than I can count, broken a toe, and sprained a wrist among other maladies and setbacks. There are days when I feel unstoppable on the mats and days when I feel helpless.
It would be nice if it was a nice linear progression from white belt to black belt. Show up, get a little better every day, avoid physical pain, and eventually achieve that coveted belt. But that’s not the real world. The real world is injuries, setbacks, and extended periods of time when it seems I can’t win a match. It’s during those times I often learn the most. They force me to slow down, reevaluate, and cease over-reliance on a particular sweep or submission.
I sense a pervasive thread of discontent among people lately with the stock market. I understand it. No one likes seeing their portfolio values decline. The S&P 500 is down ~12% year to date.[i] We often ask people, how would you feel if the market returned 15% per year for 2019, 2020, and 2021 and was up 13% YTD in 2022? Everyone says the same thing: Great! Well, that would put us exactly where we currently are. But this is the real world, where the market doesn’t take a linear path upwards and to the right. In the real world the market’s path is more circuitous: outsized returns in 2019, 2020, and 2021 followed by a decline in 2022. We’re all just focused on the decline in 2022. Our minds are playing tricks on us. Psychologists call it recency bias.
Those tricks tempt you to get out. It’s too volatile. The news is bad. Perhaps I’ll get out. Just for a little while.
You can’t have the good without the bad. It’s true in Jiu Jitsu. I had to get ankle locked to learn to avoid being ankle locked. It’s true in the stock market. You can’t have superior returns without experiencing temporary downturns.
In fact, it’s during the downturns that you find the best days in the stock market. Going back to 1992, 78% of the market’s best days (2+% advance) occurred during a bear market or the first two months of a bull market.[ii]That’s right, over three-quarters of the best days in the market happen during times like these – when your portfolio is down, and the news is bad.
So what is the impact of missing the best days?
Well, if you invested $10,000 in the S&P 500 index on January 1, 1992, your account would have grown to $208,215 30 years later.
The market is open 252 days per year. Over 30 years, that’s 7,560 days.
What if you missed the 10 best days of those 7,560 days?
Account value 30 years later: $95,390.
Miss the ten best days – only 0.13% of the trading days during that 30-year period – and your account suffered a permanent setback of 54%. Remember, most of those best days happened during a bear market or the first two months of a bull. When people were largely unhappy with the stock market.
What about missing the 20 best days?
Account value 30 years later: $56,301. A 73% permanent reduction in your wealth.
At the risk of beating a dead horse, I’ll give you the numbers if you miss the 30 best days as well…
Account value 30 years later: $35,785. An 83% permanent loss.
We must differentiate between temporary declines and permanent losses. A well-diversified portfolio declining in value due to a market downturn is a temporary loss. The number signifying your account value you see on your statement or in your portal is indeed lower, but only temporarily.
But if you succumb to the temptation to sell, the loss becomes permanent. Hence the verbiage above. Missing the 10 best days over that 30-year period creates a permanent 54% loss. You can’t get those days back.
I should note that plenty of advisors are aware of your universally human desire to hear some kind of strategy that will allow you to enjoy the long-term returns of the stock market without incurring the nasty short-term declines. Thus, those advisors are happy to provide (read: sell) “strategies” purported to do just that. You will hear things like “limiting downside risk” and “downside protection” and “tactical asset allocation.” All fancy terminology to convince you that they have the foresight and knowledge to keep you from experiencing temporary market setbacks. Just what you want to hear.
It would be nice to have superior returns without temporary declines. Just like it would be nice to become proficient in Jiu Jitsu without being ankle locked and choked out for years on the mats.
But this is the real world. And in the real world you can’t have the good without the bad.
Hang in there.
Sean Cawley, CFP®
Neither asset allocation nor diversification guarantee against investment loss. All investments and investment strategies involve risk, including loss of principal.
Content here is for illustrative and educational purposes only. It is not legal, tax, or individualized financial advice; nor is it a recommendation to buy, sell, or hold any specific security, or engage in any specific trading strategy. Results will vary. Past performance is no indication of future results or success. Market conditions change continuously.
This commentary reflects the personal opinions, viewpoints, and analyses of Resolute Wealth Management. It does not necessarily represent those of RFG Advisory, clients, or employees. This commentary should be regarded as a description of advisory services provided by Resolute Wealth Management or RFG Advisory, or performance returns of any client. The views reflected in the commentary are subject to change at any time without notice.
[i] YCharts, SPX Level Fundamental Chart, YTD (8/26/2022)
[ii] “Timing the Market is Impossible.” Client Conversations. Hartford Funds. Data sources: Ned Davis Research, Morningstar, Hartford Funds. February 2022.