Responding To Crisis

If you’re 50 years old, the S&P 500 has halved three times in your life. (Even if you’re just 25 years old, it’s happened twice.):

January 1973–October 1974 -48%
March 2000–October 2002 -49%
October 2007–March 2009 -57%

These declines occurred because of very real crises.

In 1973–74 we had the existential constitutional crisis of Watergate and the OPEC oil embargo, in which oil prices tripled overnight.

The implosion of the dot-com bubble—the most egregious stock market mania in the history of mankind—set off the second episode.

The third meltdown was in response to a global financial crisis, during which the entire world’s credit system essentially ceased to function.

Surely you’d have been right to get out of the market in response to one (if not all) of these cataclysms…wouldn’t you?

Well, maybe. Then again, maybe not.

The S&P 500’s peak in January 1973—just prior to that 48% drop—was 120. The dividend that year was $3.61. Today, the Index is around 4,020, and the dividend last year was $60.

The average annual compound rate of total return of the S&P 500 from January 1973 until last month (after the Index halved three times in the interim) was 10.5%.

Which is almost exactly what its long-term (1926–2021) average has been.

That’s not some quirky, abstract market statistic; it’s the ultimate testimony to the resilience of the great American companies.

“But that’s too much ancient history!”

But again, if you’re a 50-year old couple, you may have a dozen or more years to work, and upwards of three decades to live in retirement after that.

If you have anything close to that kind of investing time horizon, I’d say that analysis is very relevant.

At least historically, the best response a long-term, goal-focused, plan-driven investor can make to crisis is no response at all…

or, more accurately, to just tune out the apocalypse du jour and continue acting on your plan.

Warren Buffett’s teacher, the immortal Benjamin Graham, expressed this most eloquently:

“The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you need to go (emphasis added).”