You may recall the tale of Rip Van Winkle – the Dutch-American hero of a famous short story by American author Washington Irving. The plot is both simple and intriguing.
Rip Van Winkle falls asleep in the Catskill Mountains… and wakes up 20 years later.
Much has changed in his village. For one thing, he has missed the entire American Revolution – and the birth of the United States of America.
And instead of the colonies’ former ruler King George III, it’s George Washington’s portrait that hangs in his local inn.
Now imagine if you had fallen asleep like Rip Van Winkle… but for only a single year.
When you went to bed on April 16, 2018, you were 100% invested in the S&P 500 and it was trading at 2,670.
When you woke up a year later, the S&P 500 was trading at 2,907- up 8.9%.
And since you reinvested your dividends, your total return jumped to 11.5%.
With the average annual historical return on the S&P 500 at approximately 10%, you’d think it was a better-than-average year.
But otherwise, not much had happened.
Now compare this with your actual experience.
If you remained awake, the last 12 months were among the most stomach-churning since the global financial crisis of 2008.
What the Heck Just Happened?
Starting last April, the S&P 500 embarked on a steady stairstep path upward until it hit a new high in late September.
Then, almost overnight, the market fell out of bed, eventually tumbling nearly 20%.
After bottoming on Christmas Eve, the S&P 500 spent the next four months embarking on yet another steady stairstep path upward.
And it is now trading at just short of new record highs.
But those slowdowns were enough for the market Cassandras to emerge from the woodwork.
Permabear David Rosenberg confidently declared in early January that a recession is virtually unavoidable in 2019.
But as the U.S. stock market started to recover, the doom-and-gloom narrative also began to wane.
Almost overnight, the “Goldilocks scenario“- a U.S. economy that is not too hot, not too cold – is back.
Mortgage applications and durable goods orders are up. The U.S. created 196,000 jobs in March. Average hourly wages are up 3.4% year on year, and the unemployment rate of 3.8% is close to the lowest since 1969.
The inverted yield curve – often a signal of an imminent recession – is also back to normal again.
And perhaps most importantly, the Fed has signaled that it doesn’t expect to raise rates this year.
As one reporter for The Wall Street Journal observed, “Eventually the central bank could take the punchbowl away, but for now the drinks are on the house.”
What Would Rip Van Winkle Do?
Of course, a soundly sleeping Rip Van Winkle would have noticed none of this.
And had you been asleep this past year, you would have remained blissfully ignorant of the 20% sell-off of U.S. stocks during Q4 2018.
And spared yourself the gut-wrenching decision of whether to participate in Q1 2019’s spectacular market rebound.
There are, of course, real-life “investing” Rip Van Winkles out there…
No, they don’t literally fall asleep.
But they do save and invest regularly. They ignore the daily machinations of the stock market. And they look at their portfolios only once a year.
So here’s the lesson Rip Van Winkle can teach you…
If you are interested in the financial markets, set aside a small part of your money to speculate with. But with most of your money, do what Rip Van Winkle does – invest regularly, ignore the news and do nothing.