REMINDER: Markets Don’t Go Straight Up!

Most equity markets were down 3% today, and most equity are markets down 5% this week! It’s the worst week for the Dow since 2011! The Dow is now in correction territory. What’s going on???

It’s been an unusual year. January and February were quite good. But not much has happened since then until this week’s market sell-off.

China’s apparent slow-down seems to be the main catalyst to what triggered this week’s ugliness, but we continue to have the uncertainty as to when the Fed will raise rates, if/when Greece will leave the Euro, and mixed second quarter earnings reports and economic news.

It is times like these that investors need to remember that markets don’t just go straight up. Markets don’t work that way- they go up and down! Not every calendar year can be an “up” year. As a long-term investor, you not only stay invested, but even may see this as an opportunity to buy more.

There have been over a dozen market pullbacks of 5% or more since March 2009. This is another one! Generally, when the market comes back, it does so quickly. So, it’s a fool’s game to try to time the market and jump in and out of it. No one has a crystal ball. Furthermore, we know that over time that staying invested is your friend. Studies show that just missing a few days of strong returns (which we could very well get next week or later this month), can drastically impact overall performance.

The market constantly over-reacts and then reverts back to the mean. Do not get caught up in emotion and sell and buy at the worst times. Unfortunately, humans are not wired for disciplined investing and usually trade poorly based on fear. They wind up selling at the lower prices (on fear) and buying at the higher prices (on elation) per the graph below.

Emotions

I’m sure many readers are nervous after this latest week with all this uncertainty in the air. However, if you use a wealth manager, like DWM, we can help you focus on what can be controlled:

  • Create an investment plan to fit your needs and risk tolerance
  • Identify an appropriate asset allocation target mix
  • Structure a well-balanced, diversified portfolio
  • Reduce expenses through low turnover and via passive investments where available
  • Minimize taxes by using asset location, tax loss harvesting, etc.
  • Rebalance on a regular basis, taking advantage of market over-reactions by buying at low points of the market cycle and selling at high points
  • Stay Invested

In closing, a pullback / correction like this one might actually be a very healthy thing because it may signify that the underlying assets’ valuation is getting back in line with fundamentals. So don’t get anxious over this latest short-term market volatility. By all means, there is a lot of “noise” this month. We’ve seen “noise” before and we’ll see “noise” again. Instead, remember that, over the long-term, the markets have rewarded discipline, through world events of all types. Check out the graph below, put your mind at ease, and have a great weekend. Let us deal with the “noise” and give us a call if you’re still feeling anxious next week.

Markets Have Rewarded Discipline

DWM Fall 2014 Seminar Recap

BMD seminarWe just wrapped up our fall seminars which focused on Pullbacks, Corrections, Bear, and Bull markets. Both venues – Palmetto Brewery in Charleston and Emmett’s Brewery in Palatine – served as great places to not only deliver an important financial presentation, but also as fine places to just hang out and visit with one another.

In case you missed our October seminars entitled “Is it Time for a Pullback, Correction, or a Bear Market?”, here is a quick recap:

  • Pullbacks, Corrections, and Bear Markets all signify a move down of 5, 10, or 20%, respectively, from a recent peak. They may sound scary but a Pullback/Correction might actually be a very healthy thing because it may signify that the underlying asset’s valuation is getting back in line with fundamentals. In other words, Pullbacks and Corrections are different from Bear markets in that they may be simply a “pause” that refreshes an otherwise healthy Bull!
  • Diversification plays a huge role to a balanced portfolio. The end of September and beginning of October saw a significant Pullback in equity indices, e.g. Russell 2000 Small Cap, S&P500, etc. However, other asset classes were not exhibiting same price movements. In fact, some fixed income indices experienced no pull back and traded at all-time highs. Alternatives also experienced non-correlation benefits. The media (i.e. CNBC) would have you believe that investing begins and ends with only large cap domestic stocks. Diversified investors don’t need to get caught up in their obsession.
  • History shows that Bull markets typically last greater than 5 years on average and Bears about a quarter of that. Bear markets experience more volatility, given the fear that usually surfaces during these times. Bull markets don’t end based on a particular time frame, but instead end from an external shock (e.g. overvaluation/bubbles, inflation, etc).
  • Bull & Bear markets are driven by greed and fear as much as economic fundamentals. Humans are not wired for disciplined investing, hence investors can help themselves gain discipline by using a wealth manager like DWM to focus on the things that one can control, and avoid emotional, poor decisions based on things one cannot control.
  • Trying to predict short-term markets is virtually impossible. Markets don’t necessarily correlate with current economic data. The world has changed and old formulas and rules of thumb may not apply. Global concerns can cause investors’ appetite for risk to diminish overnight. However, over the long-term, the markets have rewarded discipline, through world events of all types.
  • Trying to time the market is a fool’s game. Studies show that missing just a few days of strong returns can drastically impact overall performance.
  • Your financial adviser should help you focus on what you can control. This includes creating both a financial plan and an investment plan. You also need to stress test these plans. And, then you need to review your risk profile- which is a combination of risk capacity, risk tolerance, and risk perception.
  • The markets cannot be controlled, but asset allocation can be. Asset allocation is the primary driver of returns. Once you have your risk profile, you are in a position to construct an appropriate asset allocation target mix. Use of multiple asset classes (equities, fixed income, alts) lead to non-correlation benefits. Non-correlation leads to a smoothing effect to your return profile which means smaller downsides. Smaller downsides lead to better geometric compounding, hence better LONG-TERM RESULTS. The chart below shows the impact of downside volatility and why one wants to avoid that.
  • Seminar slideFocus on things you can control:
    • Create an investment plan to fit your needs and risk tolerance
    • Identify an appropriate asset allocation target mix
    • Structure a well-balanced, diversified portfolio
    • Reduce expenses through low turnover and via passive investments where available
    • Minimize taxes by asset location, tax loss harvesting, etc.
    • Rebalance on a regular basis, taking advantage of market over-reactions by buying at low points of the market cycle and selling a high points
    • Stay Invested

Using a dedicated and caring financial advisor can keep you focused on the above items and more. Most importantly, an advisor like DWM can keep you and your portfolio disciplined so you can reach your long-term financial goals.

LGD seminar2