I’m thinking it possible that you may have caught wind of a little action in the stock markets. If a financial website or network or person has gotten you feeling a bit freaked out, or if you’re feeling more stress than you’d like (and note, you shouldn’t be feeling any stress relative to your portfolio), don’t spend too much time reading the below. Instead, call me when you can, and let’s talk. Don’t ever let anything financial related fester. Let’s always nip it in the bud.
Now, let us go backwards a bit before we can go forward.
About 6 ½ years ago – in August of 2011 – I wrote a letter to my clients, as markets were falling fast and furious. If you remember, for the very first time in our country’s history, the U.S. Government Debt was downgraded from AAA to AA+. In addition, Congress – in their ultimate wisdom – was threatening to default on our debt – again. For those that paid too much attention to these news events, significant stress ensued. And, for many of those people, the stress became too much to bare – as they felt they couldn’t handle another 2008 type event – and they sold out of whatever portfolio they had and “waited for things to get better.” The S&P 500 stood at around 1,100 that day.
Almost 2 years ago to this day, I sent out a similarly themed note. To refresh your memory, the U.S. stock market began 2016 with the WORST six trading days of a year EVER. Every morning for the month of January, one could have listened to Becky Quick’s solemn tone, declaring that CNBC was on “market alert.” Since there was nothing as specific as a debt downgrade to trigger 2016’s market correction, the financial pundits had to drum up a variety of reasons to explain the worst 6 day start ever. I heard it was the Chinese stock market bubble, or the “hard landing” in China’s economy, or Middle East escalations (I’ve never heard that one before), or increased tensions in North Korea (vaguely familiar) or the Fed raising interest rates (hmm) or the upcoming uncertainty of the Presidential Election or Goldman Sach’s prediction of continued plummeting oil prices. The S&P 500 dropped as low as 1810 in late January of 2016. This drop was about a 14% decline from the previous high, which I found rather interesting, as the S&P 500 has AVERAGED a 14% top to bottom decline EVERY SINGLE YEAR since the end of WWII. Said another way, the great 14% “meltdown” the networks talked about was an event that happens EVERY SINGLE YEAR on average. But, once again, folks who paid too much attention to these news events (some of which were the same folks who sold in 2011) packed up their bags, sold their portfolio and waited for more certainty to unfold with respect to the election and economy. These people are still waiting.
As I write Monday evening, the S&P 500 has declined over 7% in the past two trading days, closing today at about 2,648 (a 46% return and a 21% annualized return from Jan 16’s lows, but who’s counting). While not at all unprecedented (we had a similar two day drop less than 2 years ago in June 2016 following the Brexit vote, remember that?), a 7% two day drop cannot be construed as “normal” volatility. But, let me tell you what is even less normal: the complete lack of stock market volatility in all of 2017. Volatility in stocks IS normal. Let me write it again. Volatility in the stock market is very normal. Healthy in fact.
So, what should we expect moving forward?
In the SHORT TERM, we should expect decent volatility in the stock market. Why? Because we should ALWAYS expect volatility, as stocks are volatile. Their greater returns (vs bonds/cash) over time are directly correlated with their greater volatility. But, remember, volatility and risk are not the same thing. Stocks exhibit much greater short term volatility than cash, but cash is a much riskier investment over long periods (call/write if you need a refresher or more explanation on this). Due to the significant short term drop, it is possible that there may be some liquidity constraints on certain securities and spreads could widen. None of these issues will affect patient investors, but they can and will affect many less than patient investors.
Most importantly, these SHORT TERM gyrations do not affect your LONG TERM plan one iota. You have a well-designed, well thought out plan that allows you to live the life that is most important to you. The key to maintaining your plan and achieving your goals is to stay focused on what you can control. You can control the amount of cash you have in reserve. If you’re not comfortable with the amount of cash you have as an emergency, then please, let’s talk. You can control the makeup of your bonds, making sure they are of high quality and of the shortest term – and they are. You can control your asset allocation based on your own unique need, ability and willingness to take on stock market exposure. And, we have done this together. And, you can control your emotions – although, we all sometimes need a little help with our emotional makeup. A big part of my job is to help fly you above the ever-changing (but ever-present) storm clouds of current events. If you feel that storm in your mind brewing today or if it comes later this week or later this year, don’t wait. Call me and let’s talk through what we need to in order to get you to return to a peaceful state of mind.