In our most recent blog, Trouble With a Capital T, we discussed the possibility that proposed tariffs, if implemented, could create trouble for the economy, and by extension, financial markets. Well, we didn’t have to wait long as President Trump went through with his promise to impose tariffs on Canada, Mexico, and China last week. To almost no one’s surprise, equity markets sold off as fears of a recession mounted. As of Friday March 14, the S&P 500 was down 9% and the tech-heavy NASDAQ was off 12% from their respective record highs. In a flight to safety, interest rates fell across the maturity spectrum.

If there is one characteristic of common stocks that is irrefutable, it is short-term volatility. Almost every year, broad-based equities drop by an average of about 15% at some point during the calendar year. Occasionally, they will experience declines of 20%-35%, such as the rapid 35% sell-off in March 2020 at the beginning of the COVID-19 pandemic. Once in a blue moon equities experience losses in excess of 35%. Yet, on a calendar-year basis, common stocks produce positive returns about 70% of the time. That’s because our economy is growing about 70% of the time and with that economic growth comes growth in corporate profits, dividends and company valuations. The problem many investors have is tolerating that short-term volatility. Let’s face it, we all want the highest possible return with the least amount of risk and therein lies the dilemma.

Many investors make the mistake of trying to avoid the periodic and temporary downturn in equities by market-timing, which almost never works. Such impulse actions can create opportunity loss, adverse tax consequences in taxable accounts and seller’s remorse when it doesn’t work. To be successful with market-timing you must make two prescient calls, getting out at the current top and getting back in at the next bottom. You will only recognize the current cycle’s top and bottom in hindsight. Waiting on conditions to improve to signal “all clear” often means buying back in at levels above your exit point. This is a form of speculating, not investing. The most successful long-term investors practice a buy and hold strategy allowing these great companies to generate wealth for them, knowing their only requirements are to sit tight and buy more shares at every available opportunity.

One goal of investing is to grow your money at a “real” rate of return, net of taxes and inflation. Ownership in a broadly diversified collection of the world’s greatest companies has historically been a prudent way to do just that. To possess any hope of achieving that goal, one must stay fully invested at all times or risk being left behind as equities take the next step forward on their permanent wealth creation journey. Anyone who owns shares in companies should possess a minimum 5-year time horizon. That is because most market declines fully recover in five years or less. Will there be another leg down with another 10% or greater decline before share prices recover? No one knows for certain. Bear in mind that every stock sold because someone is fearful of a temporary decline is simultaneously purchased by someone else who sees opportunity ahead.

Invest for the long term.