Trying to reason with hurricane season

When you own property on the ocean, nothing gets your attention every year like hurricane season. My wife and I have owned a beach condo in North Carolina for years, the state in which we both grew up, met, and got married. We even honeymooned at the beach – in early January!

Our place is small, but the location is wonderful – I mean horrible – depending on what weather might be approaching. Let’s just say that the next time a hurricane comes ashore near Wrightsville Beach, we’ll have front-row seats.

Why do beachfront property owners put up with such risk? Simple: because life at the beach is so wonderful when there aren’t hurricanes on the radar, and thankfully that is most of the time.

That’s kind of what owning stocks is like. Since the beginning of 1928, there have been 56 S&P 500 market corrections, when the index falls 10% or more from any point – one correction every 20 months or so. Twenty-two of those 56 corrections turned into full-fledged bear markets, where stock prices decline 20% or more. That’s a bear market every four or five years. And yet, the S&P 500 has managed to deliver average total returns just shy of 10% per year despite all those downturns.

Bear markets are no fun, as most investors can attest. But unlike hurricanes, bear markets can’t kill you. They can’t even cause permanent damage to your portfolio unless you let them, unless you give in to panic and sell. Legendary investor Peter Lynch once said: “The key to making money in stocks is not to get scared out of them.”

And you’re less likely to get scared out of stocks when you remember why you own them: to finance your long-term spending goals, after time has rinsed most of the market risk out of them. Short-term spending goals require more predictability, making high-quality bonds and cash the way to go, despite their lower historical returns. Remember, to lower the risk of having to sell stocks when prices are down, keep the rent money out of the market.

When market volatility spikes higher, we never know if it’s the beginning of a hurricane, a tropical storm, or just another run-of-the-mill summer squall. Experienced investors learn to expect them and to take advantage of the opportunities volatility often creates.

By the way, I should point out that no fewer than 1,200 hurricanes have made landfall on the Atlantic coast of the U.S. over the last 100 years – about 10 per year on average. And because North Carolina thrusts its chest so proudly out into the Atlantic, more than a third of those hurricanes came ashore there over the last century. If you own beachfront property in the Old North State, you should expect about four hurricanes per year, not counting tropical storms, which they throw in for free.

Clearly, the odds have been better owning stocks. But if you’re going to own them, you’re going to face your own kind of storms more often than you’d like. Historically, equity investors have been rewarded with higher returns in exchange for accepting those persistent risks. You manage market risk by designing an investment portfolio around your unique goals and timelines.

If you’re going to own property at the beach, you accept the near-certainty of somewhat frequent, violent weather, and you buy hurricane insurance. The reward: a few glorious days in paradise each year.

And it’s been years and years of patiently compounding those equity returns that have made our little paradise possible in the first place.

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Any opinions are those of Mike Brown and not necessarily those of Raymond James. This information is intended to be educational and is not tailored to the investment needs of any specific investor. The information contained in this report does not purport to be a complete description of securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including asset allocation and diversification. Past performance is not indicative of future results.