2018: Sure Things to Watch on Wall Street
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What is the main topic discussed in this episode?
This is Your Money Matters from The Wall Street Journal.
Welcome to Your Money Matters. I'm Anne-Marie Fertoli with J.R. Whelan in New York. The stock market always has a trick or two up its sleeve, giving credence to the often used adage, you can't time the market. And while there may not be many guarantees beyond death and taxes, Wall Street Journal intelligent investor columnist Jason Zweig says investors should keep an eye out for a few things almost certain to occur. So Jason, let's start with investors should be ready for declines, even slight ones, that will set off a mood of panic.
How should investors prepare for market declines and panic in 2018?
And the key here is don't take your eye off long-term investments.
Yeah, well, what's really interesting, Anne-Marie, is that the way people react to a market decline obviously depends partly on how much the market goes down. But a financial historian recently showed that it also depends and depends even more so on how much it goes down relative to how much it's been fluctuating recently. So in a market as smooth and stable as we've seen over the past few years, you really should have the expectation looking ahead that if the market goes down pretty much anything at all, people will be much more upset by it than they normally would.
And the thing to consider, Jason, with a long-term performance of stocks, we should look beyond the simple numbers on paper, especially once we get to the end of the year because of the impact of the recession.
Yeah, absolutely. What's going to happen in the fourth quarter of 2018 is that the financial crisis of 2008-2009 will start to disappear from the 10-year historical record because the worst of the months were October and November of 2008. And those returns are going to fall away. They will no longer be in the 10-year record as of November of this year. When that happens, the long-term record of the stock market looking back 10 years will suddenly improve. In fact, the average annual return on the S&P 500, even if the market goes nowhere from here where we are today, would effectively double just by losing those months out of the 10-year history.
So it's important to just have a smart look at it and understand what you're looking at and what's influencing the numbers.
Yeah, exactly.
How will the 2008–2009 financial-crisis months dropping out of the 10-year record affect long-term returns?
It's not that stocks have suddenly become more profitable than they used to be. It's just that two of the worst months in modern history have disappeared from the 10-year history.
Jason, in your piece for The Wall Street Journal, you say that a seeming lack of risk is a risk in and of itself. And you touched on this in your first answer. But can you explain a little bit more what you mean by that?
Well, yeah. I think what's really happened is we've gotten to the point where we've gone so long without a major decline and the volatility is very low. Stocks fluctuate day to day just in the smallest of scales at this point. So, it's very easy to be lulled by that into a sense of false security or a feeling that stocks only go up, people always buy the dips, et cetera, et cetera. And I think the difference between investors and pretenders is that it's very easy to say you're a long-term investor. when the market is going up. When it starts to go down again, suddenly it becomes a lot more difficult.
Why is a seeming lack of risk in the market itself a risk for investors?
And people should really look themselves in the mirror and ask themselves whether they're really ready for a sharp decline. I'm amazed at how many people I talk to who don't think or don't believe or don't remember that from the peak in 2007 to the bottom in 2009, stocks went down over 50%. Every dollar you had became 50 cents. And that very well could happen again. And if it does, and you're not expecting it, you probably will sell at the bottom.
We're speaking with The Wall Street Journal's Jason Zweig, and you're listening to Your Money Matters from The Wall Street Journal. Welcome back, everybody. So, Jason, the market will certainly have its ups and downs this year, but let's focus on what's known as correlation. That is the companies moving up and down almost in lockstep.
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Chapters
8 chapters
1
What is the main topic discussed in this episode?
0:02–0:39
2
How should investors prepare for market declines and panic in 2018?
0:39–2:30
3
How will the 2008–2009 financial-crisis months dropping out of the 10-year record affect long-term returns?
2:30–3:39
4
Why is a seeming lack of risk in the market itself a risk for investors?
3:39–5:07
5
How can investors test whether they're truly ready for a sharp market decline?
5:07–6:04
6
What does rising stock correlation (or lack of it) mean for stock pickers and active managers?
6:04–7:53
7
Are unconstrained bond funds a safe hedge against rising interest rates?
7:53–8:24
8
What practical action steps should investors take given these 2018 market warnings?
8:24–8:36
Speakers
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