Welcome Back Volatility
After experiencing very little stock market volatility in 2017 , global markets have been on a bit of a roller-coaster in 2018 . Markets climbed higher in January as investors were excited about higher corporate earnings and the potential for the recently passed U . S . tax cuts to spur economic growth . Then , in February , dropped -10% in about a week ’ s time as interest rates moved higher on concerns of rising inflation . But , just as quickly as the market dropped , it recovered most of the lost ground . Then , in mid-March , investors were worried that the potential of a global trade war would slow business activity and the economy , and the markets declined -5%.
If one thing is clear from this up and down movement , volatility is back . Of course , we don ’ t like it when we see our investments go down , but volatility is a normal part of investing .
Let ’ s look at this in more detail using the chart as our reference . Each orange band represents a period when the stock market experienced a sizable decline , either a full market correction ( when the stock market declines -10% from a recent high ) or a minor correction ( when the stock market declines -5% to -10%).
S & P 500 Index & Market Declines
January 2008 to March 2018
By Daniel T . Newquist , CFP ®, AIF ®
Daniel T . Newquist , CFP ®, AIF ® is a Principal Wealth Advisor with RNP Advisory Services , Inc ., in Morgan Hill with over 20 years experience advising clients on their personal wealth and business planning needs . Investment advisory services offered through RNP Advisory Services , Inc . – a registered investment advisor . Securities offered through Securities America , Inc ., member FINRA / SIPC . RNP Advisory Services and Securities America are separate entities . The Investment Fiduciary standard of care applies to advisory services only .
dnewquist @ RNPadvisory . com or call 408 . 779.0699 .
Source : Morningstar . Orange bards indicate decline of 5 % or more . Past performance is not indicative of future results . Standard & Poor ' s ( S & P ) 500Index is comprised of 500 large U . S . stocks . Indexes are unmanaged baskets of securities that investors cannot directly nvest in ; they do not include advisory fees or other investment expenses .
There have been 13 market corrections that ranged from -5.1 % to -19.4 % since the Financial Crisis of 2007-2008 . That averages out to 1.4 corrections per year , which is little higher than the historical average , but not too far off .
The point that is important to make is we shouldn ’ t be overly scared of volatility . Sometimes volatility is just volatility and it doesn ’ t always mean we are headed for a bear market or an economic recession . In fact , when we focus on the blue line , despite all the declines and all the volatility that investors faced every year , stocks continued to move higher . Of course , volatility is not the reason stocks move higher — growth , innovation , greater efficiency , and / or improved economic conditions are usually the driving forces behind higher stock prices — but volatility is a byproduct of that growth .
We all have heard the saying that risk and return are related . That is as close to an investment certainty as we can get . So , if we want to enjoy the outsized returns that stocks offer , we need to be willing to tolerate the volatility that comes along with it .
So , what should you do when a correction strikes ?
First , don ’ t panic . Chances are that your original investment objective for your portfolio still holds true , even if your portfolio followed the stock market lower . Though anytime is a good time to review your objective and ensure your portfolio strategy is still appropriate , a correction is a reminder to do so . Only when there ’ s been a fundamental change in an investment you own or in your investment objective , does it make sense to sell .
Further , having an effectively diversified portfolio is a helpful way to manage volatility and ride out market corrections . With an effectively diversified portfolio , we can help mitigate the risk associated with country , industry and company specific events . And , having a mixture of stocks and bonds helps manage the overall volatility that comes from global economic cycles and events . Diversification is a powerful tool if used appropriately . Great companies tend to increase in value over time , which is a great incentive to buy and hang on over the long run .
GILROY • MORGAN HILL • SAN MARTIN AUGUST / SEPTEMBER 2018 gmhtoday . com
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