Broker Check

Volatility Questions 2018

| April 11, 2018
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Everyone has a plan ‘till they get punched in the mouth – quote Mike Tyson 

Last year, stocks marched higher with only minor pullbacks. When the year ended, the largest peak to trough decline for the S&P 500 Index was just under 3% (St. Louis Federal Reserve data on the S&P 500). It was a year that lacked turbulence and one that rewarded diversified investors.  The largest peak to trough decline thus far in 2018 is roughly 12.5%.  As such, we have been fielding calls and emails from clients asking whether it’s time to “do” something.  This is a perfectly normal reaction given the circumstances.  I guess we all have been punched in the mouth this year but don’t worry, we have a plan.  Here are some examples of questions we have been asked this year.   

Question: Why do the markets seem so volatile this year? 

Answer:  Recency bias is at play with this question.  You may have noticed 2017 was amazingly calm, thus the increased volatility this year feels worse than what it is.  Here is some perspective, while there have been four weeks that produced lower performance than any week of 2017, there have already been five weeks that produced higher performance than any week in all of the 2017.   

Take Away:  Since the beginning of 2018, normal volatility has returned. It’s a reminder that periods of relative tranquility don’t last forever.  In my opinion, it’s something that the long-term investor should look past, though I recognize it can create uneasiness among some investors. 

Question:  Should I get out of equities and move to cash? 

Answer:  If we were facing serious economic problems, something that might be signaling a recession, it would be a cause for concern. Right now, I don’t believe we are.  If you believe you have sufficient cash on hand and income sources to handle your day to day financial needs, and your portfolio is globally diversified in a way to avoid too much risk exposure to one asset class like U.S. stocks, then allow your portfolio to do its job. 

Take Away:  Know your capacity to handle risk from the get go.  Normal volatility will feel terrible when it occurs, but getting overly anxious about it and doing something rash may do more harm than good in the long-term.  

Question:  I heard the Trump trade talk is causing the market to be so volatile, is that true?   

Answer:  Yes, to a certain degree, but it is irrelevant if you’re focused on long-term investing.  Shorter term, however, headline risk continues to whipsaw sentiment.  Our markets are well known for reacting to headline geopolitical events but, historically, these rough patches of volatility usually resolve themselves within a relatively short period of time. 

Take Away:  While the odds of a major trade war remain low, all this has injected uncertainty into market sentiment.  Before I go on, let me say that it is not my role as your financial advisor to offer up opinions on political issues.  However, it is incumbent upon me to analyze and share my thoughts on headlines that are influencing shares.  It’s not a political statement.  It is a commentary on events viewed through the narrow prism of the market.  

Question:  What are you doing to protect my financial plan/portfolio in this environment? 

Answer:  First, by understanding the required average annual rate of return your plan needs to accomplish your goals.  Furthermore, by maintaining the acceptable level of risk exposure over a stated period of time, including up to and through retirement.  During times when offense is rewarded, like last year, the equities should do the heaving lifting.  This year, defense is being rewarded and the bond allocations are doing the heavy lifting.  Our job is to help you “right-size” the allocation between offense and defense.  

Take Away:  Exposure to a truly global and diverse portfolio is the most important component of reaching long-term financial goals and objectives while minimizing risk, and diversification reminds us how important it is for investors to resist the urge to put all their eggs in one basket.  

Question:  I have new money I want to invest, what should I do now? 

Answer:  The right plan expects and plans for periods of decline to occur.  Systematically adding to retirement accounts, especially during a decline, is a great way to hedge normal volatility.  

Take Away:  Don’t let market noise or current events dictate investment selections, and stick with the plan!   

Final Perspective

I provided a brief explanation for the recent volatility because I believe one is in order, but let me caution you not to get lost in the weeds.  Day traders care about minute-by-minute swings in stocks prices.  Long-term investors sidestep such concerns. 

So, let’s step back and gather some perspective by reviewing the data. 

According to LPL Research— 

  • The average intra-year pullback (peak to trough) for the S&P 500 Index since 1980 has been 13.7%.
  • Half of all years had a correction of at least 10%.
  • Thirteen of the 19 years that experienced an official correction (10% or more) finished higher on the year.
  • The average total return for the S&P 500 during a year with a correction was 7.2%. 

These bullet points are an evidenced-based way of saying turbulence surfaces from time to time. Patient investors who don’t react emotionally have historically been rewarded. 

I understand that some degree of risk is inevitable.  But our recommendations are designed to minimize risk, and they are designed with your long-term goals in mind. 

If you have any questions or concerns, we are as close as the nearest telephone. 

Table 1: Key Index Returns

 

MTD %

YTD %

3-year* %

Dow Jones Industrial Average

-3.7

-2.5

10.8

NASDAQ Composite

-2.9

2.3

13.0

S&P 500 Index

-2.7

-1.2

8.6

Russell 2000 Index

1.1

-0.4

7.2

MSCI World ex-USA**

-2.2

-2.7

2.5

MSCI Emerging Markets**

-2.0

1.1

6.3

Bloomberg Barclays US

Aggregate Bond TR

0.6

-1.5

1.2

Source: Wall Street Journal, MSCI.com, MarketWatch, Morningstar

MTD returns: Feb. 28, 2018-Mar. 29, 2018

YTD returns: Dec. 29, 2017-Mar. 29, 2018

MSCI returns run through Mar. 30, 2018

*Annualized

**in US dollars

 

I hope you’ve found this review to be educational and helpful.  If you have any concerns or questions, let me say this one more time–please feel free to reach out to me.  That’s what I’m here for. 

As always, I’m honored and humbled that you have given me the opportunity to serve as your financial advisor.

 

Phil E. Gose

 

Portions of this article were created with the assistance of Horsesmouth 

The views expressed are not necessarily the opinion of FSC Securities Corporation, and should not be construed directly or indirectly, as an offer to buy or sell any securities mentioned herein. Individual circumstances vary. Investing is subject to risks including loss of principal invested. No strategy can assure a profit against loss. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed.

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