We understand it can be unnerving to watch your portfolio balance gyrate as volatility returns to the markets. While the level of volatility in 2018 merely returned to its historic average, it probably felt a lot worse as we just exited one of the lowest volatility years in market history in 2017. When the markets are like this, the first reaction is normally an emotional one. You feel like you should do something when in reality, the solution for you is to do nothing. At least not with your portfolio. That is our job! All we can do is focus on what is within our control. For most, this means spending. When markets get uncertain, your outflows should be the first place to focus.
Rest assured, our tactical asset management process triggered adjustments in your portfolio to reduce risk PRIOR to the pullbacks in February and December. Our process is proactive rather than reactive. The goal is to reduce portfolio volatility before markets start to act like this. Remember, the markets are not within our control, and from time to time they go down. They must go down temporarily in the short run. If there was no volatility, there'd be no risk. If there was no risk, there'd be no return! These kinds of markets are the short-term cost of long-term wealth accumulation.
Here are some facts that I like to remember:
For more than a century the market has seen close to one correction (decline of 10% or more from the previous market high) every single year. They can feel so consuming when you're in them... but the fact of the matter is they're just an essential, common part of the long term rising market that we get to enjoy over the decades.
The market has always risen despite these short-term setbacks. Between 1980 and 2015 the S&P has fallen on average -14.2% at least once per year. During this same time period, the market achieved a positive return 27 out of the 36 years. That's 75% of the time. Within this time period, there were multiple wars, the worst financial crisis since the Great Depression, and many other roadblocks.
This is important: corrections become bull markets. Every single time. But this takes patience. You have to ride the good and bad markets. I love this quote from Warren Buffet. "The stock market is a device for transferring money from the impatient to the patient." It's so true. Mathematically it works out like this. From '96 to '15 the S&P returned an average of 8.2% a year. But if you missed out on the top 10 days during this 20 year period, your returns were slashed to just 4.5% per year on average. Top 20 days? Your average annual return was a measly 2.1%.
We understand that you’re human. If you weren’t at least a little concerned right now, you wouldn’t be human! This is just the dark side of the risk we take in investing. Thankfully with the right mindset, allocations, and investments, these dark phases come and go.
If something arises that requires us to take action, I assure you, we will. We consistently monitor your portfolio, and we make tactical allocation changes to our investment models frequently with the changing market environment.
We urge you to reach out if you would like us to review your account holdings. We understand that knowledge is power, and we’d be happy to provide you with some education and reassurance in these trying times.
Turn off the financial headlines for a few days and recover from the holidays!
All the best in the New Year.