Posted January 22, 2019 by Joe Yagar
2018 has provided investors one heck of a ride, it has shown some of the best and worst the market has to offer in terms of both returns and emotions. Many are left wondering what’s next, and we would like to explore that debate.
At the time of writing this article the markets are still volatile with no indication, other than caution, as to whether we are at the beginning of a bear cycle, the end of a steep correction, or somewhere in between.
The October 2018 bear market follows the correction that just occurred in February-April of the same year. The intraday low reached by the SP500 during the earlier correction was 2532.69 on February 9th. That low has been breached and reached an intraday low of 2346.58 on December 26th. *
The reasons stated across the media vary, and most commonly are the potential for future interest rate hikes by the federal reserve, the heated trade negotiations between China and the US, Brexit, inversion of the yield curve, and slowing economic growth globally, just to name a few. But the purpose of this article is not to emphasize what every investor already knows and experiences, but rather to make some suggestions as to what one might consider next.
The first, and most important suggestion in our opinion is to stay calm. We all have a tolerance threshold. The tendency to bail out on a portfolio during extreme volatility is normal. During periods of extreme volatility, when negative news seems to pop up everywhere, the language used by pundits and the news headlines often spell “carnage”. The momentum drags stocks, big and small, in almost all sectors down with it indiscriminately. Panic may set in, and the fingers can’t press the “SELL” button fast enough.
If that is you, STOP. Although a lot more is at stake with your portfolio, realize that the sensation is like food shopping while extremely hungry. You get home, eat, and then wonder why you purchased so much of what you don’t need. You acted under duress, and the consequences are usually regrettable. Instead, we recommend that you revisit your portfolio, with your financial advisor if you have one, as if it is its first day. Whatever the value is and the investments within it are. Instead of getting caught up in the paper loss or gain of each investment in your portfolio, reevaluate each position as if it was the first time you and your advisor, if applicable, considered it. Is it still a good fit or is there a better alternative to move forward with from this point on? As hard as it may be, take the emotion out of the decision-making process and look forward.
If you are new to investing, and not sure whether this is a good time to take the plunge, don’t plunge. Take small bites over time. For example, if you intend to invest $100,000 in a given portfolio, start by investing $20,000 per month over the next 5 months, or some other interval you are comfortable with. **
Vis a vis the media and current events, separate the news into two categories. First, What’s a constant? For example, Trade negotiations with China, rising interest rates, the potential for slowing corporate profits, etc. Second, what’s random? For example, Huawei’s CFO was arrested in Canada and the Chinese gov’t is angry as a result, or President TRUMP is threatening GM because they announced plant closures and layoffs. The constants are more likely to have longer term implications for your portfolio. The random news we prefer to classify as noise. In this environment of uncertainty, the noise appears louder as displayed by the extreme day to day volatility in the equity markets. Once your portfolio is reconstructed, and if no new and significant constants come into play, go play golf, spend time with loved ones, or read a novel. Stay away from the day to day noise and schedule a call with your advisor to get updates if you must.
Since 1926 through September 2018, the average bull market period for the S&P 500 lasted 8.1 years with an average cumulative return of 480%. There were nine such periods. The bear market periods that followed averaged 1.4 years in duration and averaged -41%. Aside from the current bear market we are in, there were eight. That is still an average return per cycle of 283.2% over 10.5 years, or approximately a 28% simple (13.4% compound) return annually. As uncomfortable as it may be to experience a significant paper decline in your portfolio, uncomfortable, not fatal, is what it is. ***
Most portfolios don’t mimic the S&P 500 alone, so the above statistic may greatly differ for each of us. However, the emotional reaction to either missing a bull run, or feeling the pain of a steep decline may be quite similar no matter your portfolio composition, or how many bull and bear cycles any of us may have experienced. That is why having a competent, proactive, and easily accessible advisor to help navigate your portfolio and your emotions through the different cycles may prove invaluable.
Lastly, it’s important to recognize that investment markets evolve continuously. We are no longer in a local economy, but a global one. The introduction of electronic transactions, pooled investments such as mutual funds, ETFs, hedge funds, etc., day trading, and an ever-growing investor base just to name a few, all contribute to the fast and furious bull & bear cycles that we see today. That is unlikely to change, nor is it a bad thing. Change brings progress and progress brings opportunity.
So far, we have recovered from every correction, crash, and recession. Each time to reach new highs, though it may take some time to do so. Granted, past performance does not guarantee future results. However, it does suggest that keeping your head about you while most around you are losing theirs seems to be a more successful investment strategy over time.
*Yahoo Finance.
**Please consult with your financial advisor, and tax professional before investing. There may be important planning strategies and risks to consider prior to investing in the financial markets.
*** First Trust www.ftportfolios.com. “History of bear & bull markets since 1926”.
Past performance does not guarantee future results.