Welcome Back Volatility
After experiencing very little stock market volatility in 2017, global markets have been on a bit of a roller-coaster in 2018. Markets climbed higher in January as investors were excited about higher corporate earnings and the potential for the recently passed U. S. tax cuts to spur economic growth. Then, in February, dropped-10% in about a week’ s time as interest rates moved higher on concerns of rising inflation. But, just as quickly as the market dropped, it recovered most of the lost ground. Then, in mid-March, investors were worried that the potential of a global trade war would slow business activity and the economy, and the markets declined-5%.
If one thing is clear from this up and down movement, volatility is back. Of course, we don’ t like it when we see our investments go down, but volatility is a normal part of investing.
Let’ s look at this in more detail using the chart as our reference. Each orange band represents a period when the stock market experienced a sizable decline, either a full market correction( when the stock market declines-10% from a recent high) or a minor correction( when the stock market declines-5% to-10%).
S & P 500 Index & Market Declines
January 2008 to March 2018
By Daniel T. Newquist, CFP ®, AIF ®
Daniel T. Newquist, CFP ®, AIF ® is a Principal Wealth Advisor with RNP Advisory Services, Inc., in Morgan Hill with over 20 years experience advising clients on their personal wealth and business planning needs. Investment advisory services offered through RNP Advisory Services, Inc. – a registered investment advisor. Securities offered through Securities America, Inc., member FINRA / SIPC. RNP Advisory Services and Securities America are separate entities. The Investment Fiduciary standard of care applies to advisory services only.
dnewquist @ RNPadvisory. com or call 408. 779.0699.
Source: Morningstar. Orange bards indicate decline of 5 % or more. Past performance is not indicative of future results. Standard & Poor ' s( S & P) 500Index is comprised of 500 large U. S. stocks. Indexes are unmanaged baskets of securities that investors cannot directly nvest in; they do not include advisory fees or other investment expenses.
There have been 13 market corrections that ranged from-5.1 % to-19.4 % since the Financial Crisis of 2007-2008. That averages out to 1.4 corrections per year, which is little higher than the historical average, but not too far off.
The point that is important to make is we shouldn’ t be overly scared of volatility. Sometimes volatility is just volatility and it doesn’ t always mean we are headed for a bear market or an economic recession. In fact, when we focus on the blue line, despite all the declines and all the volatility that investors faced every year, stocks continued to move higher. Of course, volatility is not the reason stocks move higher— growth, innovation, greater efficiency, and / or improved economic conditions are usually the driving forces behind higher stock prices— but volatility is a byproduct of that growth.
We all have heard the saying that risk and return are related. That is as close to an investment certainty as we can get. So, if we want to enjoy the outsized returns that stocks offer, we need to be willing to tolerate the volatility that comes along with it.
So, what should you do when a correction strikes?
First, don’ t panic. Chances are that your original investment objective for your portfolio still holds true, even if your portfolio followed the stock market lower. Though anytime is a good time to review your objective and ensure your portfolio strategy is still appropriate, a correction is a reminder to do so. Only when there’ s been a fundamental change in an investment you own or in your investment objective, does it make sense to sell.
Further, having an effectively diversified portfolio is a helpful way to manage volatility and ride out market corrections. With an effectively diversified portfolio, we can help mitigate the risk associated with country, industry and company specific events. And, having a mixture of stocks and bonds helps manage the overall volatility that comes from global economic cycles and events. Diversification is a powerful tool if used appropriately. Great companies tend to increase in value over time, which is a great incentive to buy and hang on over the long run.
GILROY • MORGAN HILL • SAN MARTIN AUGUST / SEPTEMBER 2018 gmhtoday. com
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