In case you missed it, U.S. stock markets are tanking.
Since the beginning of October, the S&P 500 has shed about 7%, with losses picking up this week. The selloff is being led by technology stocks and those tied to heavy industry, especially housing. The Vanguard Information Technology ETF is down double digits from its October highs, while the SPDR S&P Homebuilders ETF is touching multi-year lows, having erased virtually all of its gain since the 2016 Presidential election.
This sea of red drew a predictable response from the traditional sources on Wall Street. Strategists at large brokerage houses penned notes to clients recommending ways to react. Financial airwaves were filled with analysis and opinion on the cause of the tumult: Was the stock market in a bubble? Has the Federal Reserve hiked rates too far too fast? Did President Trump’s trade wars finally take a toll? Is the rout spreading from emerging markets? Are passive investors to blame?.. Is a recession on the horizon?
Amid this alarm came an interesting message from one of Wall Street’s newest and fastest growing firms,
Founded in 2012, Acorns is a mobile-first robo-saving app that rounds up users’ credit and debit card spending to the dollar, hiving off pennies at a time into saving plans that are then invested in the market. The idea is to get users on a savings program — pennies added up over time can amount to something big — and grow those savings on the back of the stock market. The Dow Jones Industrial Average has returned an average of about 10% annually over the past 100-years. It’s why Warren Buffett confidently predicted at Forbes’ Centennial that the Dow would hit 1,000,000 by the time we turn 200-years old.
With those goals in mind, here was the message Acorns CEO Noah Kerner beamed to the fintech firm’s about 4 million users as stocks were cratering.
“Markets go up and markets go down,” said Kerner in a video blog. “The thing to remember is since the inception of the market, every downturn has ended in an upturn and that’s what we try to remind ourselves and all of our customers,” he said before offering the following advice. “[T]he only way you lose money is if you pull your money out of the market after it’s gone down. So what’s the way to invest? Stick with it for the long-term and don’t be driven by fear. We know you’ll thank yourself later.”
It’s a refreshing and important take amid the typical noise.
Instead of fomenting alarm, or advocating users change their financial plans, Kerner doled out boring but valuable wisdom. Stay the course. In an accompanying blog post, he added the following to Acorns’ mostly millennial aged users:
What can I do about all of this? Sit tight. Even if our long-running bull market is starting to run out of steam, the long-term direction of the stock market has historically been up. Plus, a wise investing strategy already has baked into it the expectation that there will be down periods as well as up. (It’s worth noting that, over history, the stock market upturns have been longer and larger than the downturns.)
As long as you continue to focus on the long term and stick to a well-diversified portfolio you should be prepared to weather these rocky months—and and stay on the path to achieving your financial goals.
Acorns and competitor robo-advisor
— both members of Forbes’ Fintech 50 For 2018 — are part of a new breed on Wall Street that’s using what we know about investor behavior and the stock market to solve a looming savings crisis. The pioneer of this revolution is Jack Bogle and his $5 trillion investing giant Vanguard Group. There are a few basic principals:
- Humans are almost hardwired to buy stocks at highs and sell at lows, for instance panics like the trading on Wednesday and Thursday, or on Feb. 5, when the Dow fell 1,175, the most on record.
- Fees and trading costs are a killer.
These firms seek to counter both money-killing realities by getting young people on credible plans that data shows should pan out through market cycles. And they do so using low-cost options aimed at minimizing Wall Street’s take. Though it’s not rocket science, this is revolutionary.
For too long, the investing world has been about timing, trading, and shiny but expensive investment panaceas that inevitably disappoint. Brokerages, after all, make money from trading. The more complex the trade, typically the higher the fee. Yet good traders are by far the exception on Wall Street. Alarmingly, commercials now advertise the ability to trade 24-hours a day online though common sense dictates most good financial decisions don’t happen around midnight.
The urge to trade, change course, or pay too close attention to selloffs like the one currently in progress is why too few retirement savers have enjoyed the gains offered by stock market, which are hiding in plain sight. At his shareholder meeting in May, Warren Buffett made extra effort to hammer the point home.
He held up an edition of the
New York Times
from 1942, when the outcome of World War II was still unclear (Much tougher times than today’s uncertainty about the Fed’s rate hiking cycle). Around that time, Buffett bought his first stock, a company called Cities Service, which promptly fell by a third in value. When it recovered, Buffett sold. The market was simply too volatile for the young Buffett. But what happened next? Had the $114 he used to buy Cities Service shares simply been plowed it in the S&P 500 Index, it would now be worth $400,000. Had he invested $10,000 it would be worth $51 million. That’s the power of buy and hold index investing. No surprise, Buffett recently called Vanguard’s Bogle a “hero” in his letter to Berkshire shareholders.
The reality is the average investor won’t be able to successfully trade the market, or figure out a way to react to this week’s selloff.
The good news is there’s a far better option and it’s being pitched by one of Wall Street’s fastest growing firms to the users who need it most. As Acorns’ Kerner explained: “Sit tight.”