Investment Lessons from a Christmas Gift?
With 'Tis the Season upon us, suffice it to say that gift expectations are running at a fever pitch here in our household. Our three kiddos can hardly contain themselves in their rush to remind us of their Christmas Day (or, more accurately, Christmas Pre-Dawn) gift-opening aspirations! Let's just say, yes, it's been a challenge to manage expectations.
One of my favorite holiday classics from my own childhood is A Christmas Story, especially the scene where Ralphie and his brother are tearing through their pile of gifts on Christmas morning. As they each open a "practical" present (you know, parents; the dreaded apparel you'd be buying them anyway), the look they give one another cracks me up every time. In unison, they toss aside the item and move onto what they hope will be their heart's real desire. I felt the same way when I was a kid and now, payback time, I get to watch my kids do it as well!
The stock market can sometimes be a lot like a Christmas morning for grown-ups. Admit it, when you invest, you probably do so knowing what your practical needs and tempered expectations should be … but with that still, small hope that you'll instead receive that dream return you'd really love to have.
What's happened in the markets over the past year has actually been a lot like that ideal gift. With 20%-plus U.S. market growth, and scarcely more than a few flickers of downside volatility along the way (2–3% declines here and there), who could ask for more from your market returns?
So, sure, a market that goes up and up and up forever is a gift we'd all love to enjoy every year. But, I think we both know that's not going to happen. Practically speaking, periodic downside volatility is not only expected, it's actually something we need – like a plain pair of socks now and then. If market risks were never realized, you couldn't expect to receive reasonable long-term returns for investing in companies' sometimes risky ventures.
In other words, I can't tell you when we might next experience a significant market downturn on the way to expected long-term growth. But I do know it's almost certain to return. When it does, remember that this is how the stock market deliver its gift of long-term expected returns to patient investors. It may not be as fun as a pony, but it's considerably more practical.