If you follow the business media, you will notice that they tend to exaggerate everything and take things out of context. Stocks don’t drop one percent, they “drop sharply”. Recent market declines are usually measured from the most recent peak – regardless of how recent or short-lived that peak was.
If you left the design of elevator buttons to the financial media, there would be no “Up” and “Down” buttons – they would read “SOAR!” and “PLUNGE!”.
Let’s look at the American stock market this year
The S&P500 hit a high on April 29 of this year. Over the next five months, it proceeded to shed almost 20% of it’s value before bottoming out on October 3rd.
If you were watching the news on October 3rd, you probably would have heard how the stock market is down almost 20% from the peak, which brings it close to bear territory. And in only five months. Scary stuff! It would be tempting to panic after hearing those numbers.
However, that time period is somewhat arbitrary and very short term. Since October 3rd, the S&P500 has gone up again and is only down 9% from April. That still doesn’t sound very reassuring, although it’s a lot better than being down almost 20%.
Let’s look at the return over a slightly longer time period. From the beginning of the year, the S&P500 performance including dividends is roughly zero percent. Does it still sound like it’s time to panic?
But wait, there’s more! Canadians who invest abroad in unhedged investments also experience currency changes. This doesn’t always work out well – check out any 5-10 year American investment returns in Canadian dollars for an example. But this year is different – the Canadian dollar has lost ground against the U.S. dollar since the beginning of the year and that means your U.S. investments have an automatic currency gain.
For example if you owned the Vanguard US stocks ETF (VTI), you might notice that the price in US$ has gone from $64.93 at the beginning of the year down to it’s current price of $64.51 – a drop of about one half of one percent.
However, if we convert US$ to Cdn$, we find out that the current price of VTI is $65.67 Canadian dollars. The price at the beginning of the year was $64.84 in Cdn$
This means that your VTI return year-to-date in Canadian dollars is 1.3% not counting dividends. Ok, so that return might not win any stock picking competitions, but it’s no reason to panic.
Don’t let the media analyse your investment performance – figure it out on your terms.