A year ago (to the day), I wrote a commentary with the graph from Morningstar below as a central thesis of the commentary: markets are seldomly timed correctly, and the cost of missing the “re-entry” point can be devastating to a portfolio. The recent volatility in the market provides an opportune time to revisit this important notion as an investor.
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.
Curiously, overall economic data as measured by manufacturing/non-manufacturing, GDP, employment, housing starts, and disposable income are still generating positive, even strong readings, although some segments of the economy are indicating a slowdown1. Additionally, the headlines would suggest that instability with foreign trade policies are contributing to recent market selloffs. Is this the end of the “Trump Bump” or a fizzle-out of the tax cut rally? Perhaps it’s just part of a normal economic cycle and the end of a historically long bull-run. The reality is that we simply don’t know, and won’t know until hindsight reveals empirically just how long and how dramatic this volatility will persist.
We can say with certainty that volatility is normal; so normal in fact, that 10% corrections in the stock market as measured by the Standard and Poor’s 500 index, occur on average 55% of the time, or 22 of the past 40 years have experienced 10% corrections. Of note, 14 of those 22 years actually ended up with positive returns!2
Despite the recent volatility, the S&P 500 index’s all-time high occurred on September 20, 2018 at a value of 2930.75, and is down only -1.52% year to date as of this draft. By contrast, the yield on the 10-year treasury, considered a primary bond index for U.S. treasuries, has dropped to 2.87% from its recent high of 3.23% – a textbook response to market volatility as “money flies to safety (of bonds)”. Recall that bond yields and prices move in opposite directions.
What can be done about this volatility? The short answer is that market risk, as measured by volatility cannot be diversified away. What can be controlled is investor discipline – resisting the urge to sell in down markets and become overexuberant in up 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.
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.
Best Regards,
Rich Cullen
Financial Advisor
(509) 869-3907 (cell)
(509) 413-2386 (office)
References:
1. https://www.census.gov/construction/nrc/pdf/newresconst.pdf
2. https://insight.factset.com/a-historical-perspective-of-market-corrections
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