As you can see in the chart below, this year has been a tale of two markets—with the 10 largest US stocks (by market cap) decisively underperforming the other “490” S&P 500 stocks (even though both groups have somewhat similar combined market caps—i.e. MAG 10 is more than 35% of the S&P 500—even after the large decline). There is a lesson in this, and it’s probably not what you think…
Lesson 1:
Stop whining about the market’s negative returns over the last month (see chart below) before you convince yourself to do something silly—like selling some of your best long-term holdings.
The market, as measured by the S&P 500 has been unusually strong over the last 2 years (it usually only returns around 10% each year—over the very long term), and the recent decline is a healthy pullback (no the sky is not falling as the media punditry would like you to believe).
So if you are watching the market—tick by tick—with total fear and despair—cut it out. Pullbacks are normal, healthy, and they separate the long-term winners (those that don’t sell) from the long-term losers (those that panic and sell—bad idea).
Lesson 2: Stay Goal-Focused.
Of course, not everyone should have all of their money in the stock market. For example, if you are retired and living off your nest egg savings—it’s probably a good idea to own some lower volatility bonds that will pay you steady income (to cover living expenses) even when the market gets volatile.
But if you plan on living for a long-time—and you don’t want to burn through all your savings—it’s probably a very good idea to keep owing a healthy allocation to long-term stocks too (of course, depending on your own unique, individual situation).
Lesson 3: Own good stocks in prudent amounts.
If you had 25% of your life savings in Nvidia or Tesla, you deserve the pain you’re feeling right now (both stocks are down big year-to-date) because that is too much money to have in a single stock. You can see in the earlier chart just how “small” those companies are (as compared to the S&P 500 market cap), and you should weight your positions accordingly.
For example, if you really like Nvidia stock then it may be okay to own it in a weight that is slightly higher than its weight in the S&P 500. But for goodness sake, don’t ever dump a huge portion of your life savings into a single stock! Jeesh!
The Bottom Line:
The lesson for long-term investors is to stay focused on your long-term goals. Markets get volatile from time to time, but over the long-term they tend to go up—a lot! And considering the incredibly resiliency of the US economy and its people, the stock market is extremely likely to continue its long-term trend much higher.
Be smart. Ignore the near-term fear mongering. Instead, stay focused on your long-term investment goals. Stocks are eventually going MUCH higher.