The Normal

Stocks Are Risky – This is Not the New Normal, It is The Normal

The Dow Jones Industrial Average (DJIA) has dropped hundreds of points and has recently created alarming news headlines.

This has not made any investor that I know feel good, but was this “The Normal?”

Yes, this is a reference to “The New Normal”, which was first coined in September 2009 to describe market changes “that may forever change the world.”

It’s quite catchy and has become a favorite phrase on Wall Street and in the financial press.  Someone should have trademarked it.

Beyond its clickbait appeal, though, was it just another example of a haloed Wall Street prognosticator setting unrealistic –  in this case unrealistically gloomy – market expectations?

New Normal circa 2009 suggested that the world was about to enter a prolonged period of lower stock market returns.  Instead, as has happened before, risk assets, such as stocks, have provided long-term investors with handsome returns.

Yes, the prognostications of 2009 were wrong – again.

Lest you think this characterization is a little too critical, the evidence behind this statement can be found in my posts titled Why I Don’t Make Forecasts and Groundhog Day.

The pieces aren’t long and contain data showing why I’ve never heard a seasoned professional deny – in private – that market predictions are never in doubt, but often wrong.

More to the point of the title of this piece, however, the New Normal didn’t bring any new – just the normal.

The Normal

If you are going to invest in the stock market, repeat The Normal after me.

  • Stocks are risky
  • Markets experience shocks from time to time, and can produce short-term periods of low, or even negative, returns
  • Normal markets include ups and downs, and the swings can be large when too much emotion gets involved
  • No one can forecast the future, especially when emotion is involved
  • Over long-term periods, the stock market consistently produces positive returns and long-term investors are rewarded
  • Long-term is 10-years or more

Many sensational headlines will continue be written about market declines, but when this happens two things increase for sure:

The viewership and the ad revenues of financial media organizations (see Michael Ramirez’s again on-point cartoon from 2009 – thanks also to Ben Carlson for sending this around earlier this year).

Sensationalized media coverage can be detrimental to investor behavior and returns, but one balanced article was published last year by Jeff Sommer in the New York Times.

The subtitle was, “Losses… reminded investors that they play a risky… game.”

I don’t think investing is a game, but the risk that Sommer was speaking about is normal.

As he reminded investors, even though professional “traders… [somehow] become accustomed to… placid conditions,” and the market “movements we’ve been having the last couple of weeks may not be pleasant, they are entirely normal.”

In the past, my firm has sent out emails that included links to  pieces such as What To Do Now About… which included the graph below.

The Cycle of Market Emotions

When we send out these messages, we consistently receive “thank you” calls and notes for helping to remind investors that what we all feel is normal.

Concerning stock market headlines and downturns occur frequently, but they are often not as large as we think.

Related to this, one of the best charts that I seen circulated is this one:

The 10 Worst Days For the S&P 500 Over the Past 30 Years

Source: Schroders Investment Insights. Thomson Reuters Datastream as of February 6, 2018. Data shown for the one-day fall is for S&P 500 over the last 30 years. Returns after a one and five-year period are for the total return index, which includes dividend. For information purposes only. Past performance is not a guide to future performance and may not be repeated.

First, notice that even though the recent market drop has surely made everyone feel uneasy (individual and institutional investors are all human), it doesn’t come close to ranking in the top ten S&P 500 one-day drops over the past 30 years and in fact didn’t even rank in the top 300 worst days for the DJIA over the past 100 years (click here for more details).

Next, related to the 10 Worst Days and Cycle of Emotions charts, look at the strong rebounds that often follows big drops.

I don’t have crystal balls, but I am willing to make this prediction.

The stock market will consistently generate emotional stories.

When it does, just remember the following:

The Normal is the market going up and down in a manner that can be unnerving over short-term periods.


Normal is that true long-term investors are rewarded for not reacting to sensational New Normal headlines.


An addition post worth a quick read is the following:

The First Totally Honest Stock Market Story – Jason Zweig

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