Suffice to say, these are unprecedented times with respect to the global pandemic. As difficult as it has been to digest, the market’s response is not without precedent. Markets have been digesting the dynamic plethora of information available and responding accordingly. Because we as investors cannot control market movements, these circumstances provide an appropriate opportunity to consider how history has treated long-term investors who have (and have not) stayed invested.
The graph below was presented in a 2018 client communication during yet another bout of volatility. It highlights the danger attempting to time market the market exodus and re-entry points.
It’s a natural human condition to seek an answer to “why” in the face of adversity, especially when financial security may be at stake. Financial markets are predictors, albeit imperfect, of future economic performance. Sometimes the answer is correct, but more often than not, the market under- or over-shoots the future performance.
No one knows the bottom of a given market decline. We can postulate, however, that every market crisis in the past has not halted the long-term, upward march of market performance. This is not to diminish the emotional impact during a given event but consider the following graph2 of subsequent returns of a balanced portfolio after past crises.
The following graph2 also depicts market recoveries in history when the S&P 500 has dropped by more than 20%. The subsequent bull markets are staggering in both amplitude and duration when compared to the corrections.
The astonishing speed of the current pullback is nothing short of attention-grabbing. The speed and magnitude of the drop understandably conjures up anxiety-fueled fear and a sense that an actionable response is warranted. But what can be done about this volatility? I’m reminded of some simple truths that are helpful to lay hold of during these uncertain times:
1. Volatility is normal -I’ve written extensively on this topic in the past, and the charts and graphs above depict most investors who participated in the markets last decade lived through two of the most volatile periods in history.
2. Market risk cannot be diversified away, however, risks unique to individual companies and sectors can be mitigated with proper diversification.
3. Markets reward long-term, disciplined perspectives. Resisting the urge to sell in down markets and become overexuberant in up markets insulates from the temptation to “time the markets”. The antidote to the fear in down markets is to maintain a perspective on the long-term goal you’re either working towards or have achieved in retirement.
4. Allocation decisions within portfolios should be revisited based on changes in goals and life circumstances. Volatility is a good stress-test to ensure that a portfolio designed to be appropriate for “all weather conditions” truly fits the pairing between risk-tolerance to goals.
If you have any questions about the allocation of your portfolio, I look forward to meeting with you to discuss your long-term goals and discuss an appropriate allocation. Your goals, not market predictions, are the most important criteria in determining your portfolio composition!
I look forward to speaking with you soon.
(509) 869-3907 (cell)
Please note that my office has moved. My new address
is 9 S Washington St Ste 211
1. Morningstar “Fundamentals for Investors – 2018” – https://advisor.mp.morningstar.com/resourceDownload?type=publicForms&id=3f9dff3c-f085-47a1-98ba-0bc008df9f25
2. Information provided by Dimensional Fund Advisors LP https://www.mydimensional.com/asset/567/market-declines-and-volatility
Investment advice and financial planning offered by Lodestone Wealth Management, LLC., A Registered Investment Advisor
These content provided is for general information purposes only. No information or opinion contained therein constitutes specific investment advice or offer to buy or sell securities. Investors and prospective investors should always seek advice addressing unique financial goals and objectives. Past performance is not indicative of future results.
Lodestone Wealth Management, LLC. is a Registered Investment Advisor and does not provide tax or legal advice. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
The information in this web site is based on data gathered from what Lodestone Wealth Management, LLC. believes are reliable sources. Opinions expressed in these reports may change without prior notice, and are provided for reference only. It is not purported to be complete and is not intended as the primary basis for investment decisions or as legal or tax advice to you. It should also not be construed as advice meeting the particular needs of any investor. Lodestone Wealth Management, LLC. may invest or otherwise hold an interest in companies or securities discussed on this web site.
Statements made by various authors, advertisers, sponsors and other contributors do not necessarily reflect the opinions of our firm, affiliates or Third Party Content providers and should not be construed as an endorsement either expressed or implied.
At times, Lodestone Wealth Management, LLC. may utilize third party content in part or in whole as the basis for blog content. It is provided for information purposes only. We have not been involved in the preparation, adoption or editing of Third Party Content.