Because the markets have been rocky recently, I write to put these events in context. Market drops usually create an emotional response, when what we really need to do is to step back, take a deep breath, and behave rationally. If you have done planning with me, that also helps, as it creates a guidepost not only for your portfolio, but management of other financial risks that have potential to thwart your financial well being.
Putting Market Declines in Context
First, a bit of long term perspective—-really long term, in fact. Analysts have noted that since 1900, there have been 35 declines of 10% or more (commonly called a correction) in the S&P 500. Of those 35 corrections, the index fully recovered its value after an average of about 10 months.
There is no guarantee that the length of future recoveries will happen in a similar time frame, or at all. But unless you have a need for the money in the short term, consider just being patient.
Moreover, the S&P 500 more than doubled in value from March of 2009 through 2013 with an annualized return of more than 20% (!). The S&P 500’s average annual total return over the past 50 years is 10%.Over the last few years we’ve seen outstanding results – a seven-year bull market. With long-term historical returns of the S&P 500 as a benchmark, we can see that results like that are unsustainable; your expectations may have become unrealistic.
If you did not bail out of stocks in 2008 or 2009, some investors have seen their portfolios double in value since then. It is not prudent to assume that rate of growth can continue. These recent rates of return were a gift—one that certainly should have moved you forward toward meeting your financial goals.
Market Volatility in Context
The reason we expect higher long-term returns on stocks than on cash and bonds is because they have greater volatility. There is no free lunch in the financial markets, and we have to accept volatility in times like this in order to earn the expected higher long-term returns. We take a strategic, long-term view on asset allocation, and your portfolio is invested based on your unique financial and personal circumstances.
Market timing does not work
Market timing could be the holy grail of investing, if only it could be done consistently. More typically investors end up with sub-par performance due to the extreme difficulty of getting the timing right. Despite much attention in the media to being tactical (i.e. market timing), we are not aware of investors who have consistently gotten in and out of the markets with success. Although the Holy Grail does not exist, the good news is that one does not need a crystal ball to invest with success. The benefits of a long-term, strategic view are compelling, but the higher returns associated with investing in stocks is dependent on being disciplined through both good and bad times.
The importance of diversification
One of the important lessons from the financial crisis is that diversification works. While this may not be the case on a day-to-day basis, a mix of different types of assets provides a smoother and more stable ride for your portfolio. As an example, while stocks have performed poorly in the past few weeks, most bonds have provided positive returns. The time frame is extremely short, and no one knows how assets will perform in the next few weeks or months, but it is another testament to the benefits of diversification.
If You Have a Financial Plan, You Should Sleep Well at Night
Financial well being rests on far more than just a portfolio. It is highly dependent on good savings habits, prudent management of credit, adequate insurance for risks you may face and much more. If you have taken care of these parts of your financial plan, you have addressed many of the issues which can thwart your security; in fact some of these these are far larger threats than any market volatility.
That plan would also include not putting more at risk in the markets than you can bear. If you have done planning with Kulig Financial, we have striven to resolve these issues and enhance your security.
What to Do (or not Do) Now
It is entirely possible that if you have a financial plan and have implemented it, you may not have a lot to do in response to current market events.
However, it may present a rebalancing and/or tax loss opportunity. That is where we are placing our focus for portfolios that we manage. What we are not doing, however, is changing the risk level of the portfolios, as that has been carefully designed to fit our clients’ financial situations.
As your financial fiduciaries, we care deeply about your financial well-being, and it is in times like these that it is important to stay calm and refrain from making decisions that may be detrimental to your wealth. In the meantime, we will monitor for rebalancing opportunities that may add value to your portfolio.