Given the recent volatility in world stock markets, you are no doubt concerned and wondering whether we're entering a period of extended declines. We don't know the answer to this question; no one does. We do know that making investment decisions based upon short-term news is rarely a winning strategy. In times like this it's important to remember your investments are designed to carry you through decades not days. It's important to stay focused on the long-term. While a comprehensive discussion of the current market environment is beyond the scope of this note, we do believe it's worth sharing a few thoughts to help you weather the current storm. Most importantly, we urge you to call or come in for a meeting so that we can review your portfolio strategy and planning in specificity so that you're armed with information to make good decisions.
WHAT IS GOING ON?
The financial media is notorious for assigning a single specific cause to a market decline. A month ago the target was Greece. A year ago it was Ebola and before that the Japanese nuclear crisis. The current nemesis is China and its slowing economy. The important takeaway is that markets frequently deal with uncertainty and re-price lower in the short term as they digest new information, but ultimately, in the long term, market and economic fundamentals take over. This happens because the world economy grows over time due to technological, financial and human capital coming together to grow profits or make new ones. Investing relies on this single premise and over the market history, diversified portfolios have been rewarded. Single companies and their individual stock can go to zero, but it's not a good bet that the collective world stock market will. Nor is it a good bet that it will go down and stay down. And while the steep declines of 2008 and early 2009 are certainly still scars we all bare, it's important to remember that such events are not the norm. Even more important, with judicious rebalancing, recovery is significantly faster than "buy and hold."
After an extended bull run, many investors forget that it is normal for stock markets to periodically see intra-year declines in the 5-10% range. 5% declines happen, on average, 4 times per year with an average recovery period of 2-3 months. 10% declines happen on average about once per year with an average recovery period of 8 months. What's the point? Unless you're planning on needing all of your money in the next year or two, it's no reason to panic. And if your investment time horizon is in excess of 10 years like most of our clients, the odds of losing money in a diversified portfolio are extremely low.
SO WHAT TO DO?
First, remember you are not 100% invested in the stock market. You may have been frustrated at the low return on fixed income but now the real value of diversification is at work. You also have a significant allocation to low correlation alternative investments. So, maintaining your composure and making rational investment decisions is paramount. Behavioral economists have marveled for years at the counter-intuitive decisions investors often make. When markets decline -and are presumably cheaper and "on-sale" - investors often sell. But when markets have done well, investors chase returns and increase their stock holdings at relatively more expensive prices. Both are counter to good investment strategy and hence why we monitor client portfolios frequently to try and maintain our target allocations. This "rebalancing" is where we place our focus and what we're currently evaluating in your portfolio. If stock markets continue to decline - and it absolutely can get worse - we'll begin buying stock funds in order to invest monies at these lower prices. We'll also try to dissuade you from selling stock out of fear and encourage you to think long term. But make no mistake, our primary concern is making sure you can sleep well at night with your investment strategy, so if you're losing sleep, call or stop by as often as is necessary to make you comfortable.
One of the other things we're doing is looking for bargains. Frequently, the baby gets throw out with the bath water and strategies that we've been interested in reach a level that makes them a good investment. But be forewarned, these downtrodden areas of the market are often times the ones causing the ugly headlines. For months we've been monitoring investments in the emerging markets as well as mid-stream energy pipelines via MLPs. Our investment committee is debating whether or not now is the time to take a bite at the apple. But, take solace that our focus is on risk-adjusted returns, not just buying cheap. For the better part of the last few years, we've been under a "don't fight the Fed" rule, which has served us well. If we do take positions in these areas, they will be with modest amounts of capital and in our satellite equity sleeve which is designed to make opportunistic investments. The vast majority of your stock portfolio will continue to maintain a global, diversified focus to help us earn the long-term returns that investors require in order to compensate them for the ups and downs that come part and parcel with stock investing.
Lastly, we'll leave you with a few of our favorite quotes. First from one of the legends of investing, Benjamin Graham:
"In the short run, the market is a voting machine, in the long run, it's a weighing machine." The point is that markets frequently gyrate over short periods based upon sentiment, but over longer periods, they're grounded to a long standing upward trend in world economic growth.
And, from the ultimate market guru, Warren Buffett, during the last market drop:
"'Price is what you pay; value is what you get.' Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down." - Warren Buffett
Lane M. Jones, CFP®, CFA
Chief Investment Officer
Evensky & Katz / Foldes Financial Wealth Management