Shit Happens

There were two interesting charts floating around last week on the thirtieth anniversary of Black Monday. The first one below was produced by Eddy Elfenbein.

Eliminating 1987 from this chart is a great way to visualize the fact that investors ought to focus on the long-term. Over these three years, and I understand that three years is not long-term, stocks rose more than 30%.

The other chart, which I’ve recreated, shows that over the last 47 years, the 22% one-day event is a blip on the radar. Thirty years ago, the Dow crashed to as low as 1,600, today it’s 23,000.

The implication of both of these charts is that investors need to focus on the long-term. The problem with this simplistic thinking is that declaring yourself a long-term is not even close to enough. In order to be a successful long-term investor, you have to be able to survive short-term market disruptions.

When I see these charts, the salient point to me is that shit happens, and the best way to protect yourself against this reality is to construct a portfolio that can survive a one-day or five-year shit-happens market.