After a long period of relative calm in the markets, the increased volatility over recent weeks has resulted in renewed anxiety for many investors.
Since February, the US stock market has experienced some ups and downs resulting in many investors wondering what the future holds and if they should make changes to their portfolios.[1] While it may be difficult to remain calm during a volatile stock market, it is important to remember that volatility is a normal part of investing. Additionally, for long-term investors, reacting emotionally to volatile markets may be more detrimental to portfolio performance than the draw-down itself.
It is difficult to avoid the temptation to analyze every comment or action that affects the market, but that is precisely what a disciplined investor must do. There is a rather large profession that profits on people attempting to digest and make investment decisions based on the overabundance of information that saturates the news every day. It is impossible to predict the direction of the market on a consistent basis, so why attempt to do so? What we are currently experiencing is some rather significant changes in government policy. These changes along with other potential factors are feeding new information to the investment markets. The uncertainty of the outcome is leading to the current volatility. The price of your investments is determined by the current information available. As the information changes, so do stock prices.
What we need to remember is that the stock market is amazingly resilient over longer periods of time. There will always be new news that could be a catalyst for price change of some investments. In the graph below, we have provided six (6) rather drastic events in our recent history that demonstrate what happens to a balanced investment portfolio. You will see that in every 3 and 5-year example that a balanced portfolio began to recover more quickly after a crisis. We need to remain disciplined to benefit from a recovery.
The best investors do not allow emotion to control their investment behavior. With the help of the planning team at Private Wealth Management Group, our clients have explored their financial well-being in many different scenarios. We know that the markets are volatile, so we remain disciplined and profit during times of uncertainty. Our clients profit by sticking with an investment plan that was established using your personal needs and circumstances in conjunction with your time horizon. Investment parameters have been established that guide decisions during good times and bad. We will not allow the current volatility to derail the long-term goals.
As investors, we have been spoiled in the very recent past with little volatility.
Two simple examples; 2017 was the first year since the 1800’s that did not experience a down month. Since 2009 every year the US stock market has experienced positive outcomes even with intra-year volatility. The US Large Cap Market Intra-Year Gains & Declines vs. Calendar Year Returns graph provides some data to prove these points. The lines provide the range of return in any given year and the blue bar provides the annual return for that year. One other very important suggestion I would like to make.
When listening to the news, please do not listen to the point declines - instead listen for percentages.
The graph, titled Reacting Can Hurt Performance, shows the annualized compound return of the S&P 500 Index going back to 1990 and illustrates the impact of missing out on just a few days of strong returns. The bars represent the hypothetical growth of $1,000 over the period and show what happened if you missed the best single day during the period and what happened if you missed a handful of the best single days. The data shows that being on the sidelines for only a few of the best single days in the market would have resulted in substantially lower returns than the total period had to offer.
Conclusion
While market volatility can be nerve-racking for investors, reacting emotionally and changing long-term investment strategies in response to short-term declines could prove more harmful than helpful. By adhering to a well-thought-out investment plan, investors may be better able to remain calm during periods of short-term uncertainty. Let’s try and focus on what we can control.
[1]. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes.
Source: Dimensional Fund Advisors LP.Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Diversification does not eliminate the risk of market loss.There is no guarantee investment strategies will be successful. Investing involves risks including possible loss of principal. Investors should talk to their financial advisor prior to making any investment decision. There is always the risk that an investor may lose money. A long-term investment approach cannot guarantee a profit.All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Investors should talk to their financial advisor prior to making any investment decision.
Stock Prices Adjust Quickly. Source: BloombergThe security identified is shown for illustrative purposes only to demonstrate the investment philosophy described herein. These materials are not, and should not be construed as, a recommendation to purchase or sell the security identified or any other securities. Actual holdings will vary for each client, and there is no guarantee that any client will hold the security identified.
The Market's Response to Crisis. Represents cumulative total returns of a balanced strategy invested on the first day of the following calendar month of the event noted. Balanced Strategy:12% S&P 500 Index,12% Dimensional US Large Cap Value Index, 6% Dow Jones US Select REIT Index, 6% Dimensional International Value Index, 6% Dimensional US Small Cap Index, 6% Dimensional US Small Cap Value Index, 3% Dimensional International Small Cap Index, 3% Dimensional International Small Cap Value Index, 2.4% Dimensional Emerging Markets Small Index, 1.8% Dimensional Emerging Markets Value Index, 1.8% Dimensional Emerging Markets Index, 10% Bloomberg Barclays Treasury Bond Index 1-5 Years, 10% FTSE World Government Bond Index 1-5 Years (hedged), 10% FTSE World Government Bond Index 1-3 Years (hedged), 10% ICE BofAML 1-Year US Treasury Note Index. Assumes monthly rebalancing. For illustrative purposes only. S&P and Dow Jones data copyright 2018 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. ICE BofAML index data copyright 2018 ICE Data Indices, LLC. FTSE fixed income indices © 2018 FTSE Fixed Income LLC. All rights reserved. Bloomberg Barclays data provided by Bloomberg. Dimensional indices use CRSP and Compustat data.Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Not to be construed as investment advice. Returns of model portfolios are based on back-tested model allocation mixes designed with the benefit of hindsight and do not represent actual investment performance. See “Balanced Strategy Disclosure and Index Descriptions” pages in the Appendix for additional information
Markets Have Rewarded Discipline In US dollars. MSCI data © MSCI 2018, all rights reserved. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results.
Reacting Can Hurt PerformanceIn US dollars. For illustrative purposes. The missed best day(s) examples assume that the hypothetical portfolio fully divested its holdings at the end of the day before the missed best day(s), held cash for the missed best day(s), and reinvested the entire portfolio in the S&P 500 at the end of the missed best day(s). Annualized returns for the missed best day(s) were calculated by substituting actual returns for the missed best day(s) with zero.S&P data copyright 2018 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. “One-Month US T- Bills” is the IA SBBI US 30 Day TBill TR USD, provided by Ibbotson Associates via Morningstar Direct. Data is calculated off rounded daily index values. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results.