If you’re like many investors, you watched last Friday’s 500+ point stock market sell off with a mixture of shock and awe. The decline was unrelenting, prompted in part by concerns of economic slowing in China.
That represented a 3% loss for the day, meaning we may now be entering a “correction” or a period marked by 10% declines from market highs reached in May.
We understand clients may be fearful and uncertain about how market developments may impact their financial lives, so we’ve provided guidance below. Clients are also welcome to call us this coming week to discuss the market, their investment allocation, and any concerns they might have.
Keep in mind this is a normal part of the investment process. A “correction” or 10%+ decline normally happens about once per year on average, usually in response to bad news or adverse market conditions, just like now. We’ve been spoiled by unusually calm markets, and haven’t had a correction since 2011. But periodic declines are the norm, not the exception.
Absolutely no one knows where the market is headed next. Listen to what Jim Chanos, renowned hedge fund manager and founder of $3 billion Kynikos Associates said on CNBC on Friday: “Markets go up, markets go down. I think we’ve gotten a little complacent that it’s been pretty much straight up for the past few years, but that’s not how markets work. As to whether this is the start of a bear market or a correction, I have no idea.”
Jason Zweig echoes that thought: “The one thing you can be fairly sure of is that the louder and more forcefully a market pundit voices his certainty about what is going to happen next, the more likely it is that he will turn out to be wrong.”
Forget what you hear on CNBC or read in that market newsletter. No one knows.
It may be time to turn off the news. Information overload today makes market movements virtually impossible to ignore. “The more often you update yourself on the market’s fluctuations, the more volatile and risky it will appear to you — even though short, sharp declines of 5% to 25% are common,” writes financial commentator Jason Zweig. Of course, the danger of paying too much attention to market noise is that it leads you to make harmful portfolio changes that you’ll later regret. We saw several investors who sold out in 2008 permanently lock in reduced portfolio values; those who stayed put rebounded and ended up ahead.
Remind yourself that this is why we diversify. Your portfolio is made up of stocks, bonds and other investments to help reduce risk and even out returns. While stocks may be performing poorly, many bond and alternative holdings are marching to a different drummer. If you need money, we can tap cash and bond holdings less affected by the market, and in most cases, your portfolio’s market value will have no impact on your day-to-day lifestyle or your regularly scheduled income withdrawals.
Stay focused. Your portfolio is custom designed for you, so that you can meet your long-term goals. You need growth to make sure your portfolio does not run out of steam before you do; that’s the role of stocks in your portfolio. If you have too much in cash (expected return: 1% or less) or bonds (expected return: close to 2%), you will have less volatility, but you are more likely to run out of money. Despite the decline, stocks are still the most attractive growth asset on the block.
The biggest threat to your long-term investment success is … you. It’s not easy to keep a hard head when markets decline, but emotions can lead you to make damaging decisions. “Financial markets have the ability to help you achieve your financial goals. But anxiety, fear, and overblown media coverage can cause investors to let emotions override logic, leading to knee-jerk investment decisions that can jeopardize success,” write market experts at Schwab Investment Management.
We’re here to do the worrying for you. We are carefully watching market developments, and are attentive to opportunities to add value for you. As investment professionals, we are not in favor of actions that may give you short-term relief, but at the price of undermining your long-term financial security. At the same time, we understand the anxiety that some clients may be experiencing, and urge you to contact us to discuss your investment strategy.
In closing, we would like to share one chart with you, compliments of the market research team at J.P.Morgan Asset Management. The chart, below, shows the lowest point (in red) recorded by the stock market each year since 1980. The grey bar shows the final returns achieved by the market each year as of December 31. This does an excellent job showing that market declines at some point during the year do not necessarily point to market losses at year-end. As case in point, look at “Black Monday” in October 1987, when markets dropped over 22% in one day, and 34% overall, before rebounding to close in positive territory for the year.