Market Volatility 2015: Maintaining Perspective

(August 26, 2015) The stock market has experienced very volatile weeks, perhaps striking a nerve not felt since 2008. As this is written, the S&P 500 has dropped quickly causing many investors to recall the sickening downturn of what some called “The Great Recession”. Since 1980, the average intra-year decline for the S&P 500 has been minus 14.2%, even though annual returns were positive for 27 of those 35 years, or 77% of the time. It is important to recognize that short-term fluctuations do not necessarily mean long-term losses. In periods of uncertainty, maintaining a clear perspective helps one continue with a proven, long-term investment plan.

While violent, short-term market moves are discomforting and raise anxiety for investors, they are not out of the ordinary. Since 1928 the S&P 500 has experienced a 10% correction almost once per year, even though we’ve gone more than 1,400 calendar days without one. For a longer-term view, please see the chart below. It is revealing to note that in every year since 1980 there have been intra-year declines (many of significant magnitude), and that in every year the closing point was above the peak-to-trough move.

Market Volatility 2015 (S&P Intra-Year Declines)

Drawing on the wisdom from the “Hitchhiker’s Guide to the Galaxy”, it is important that investors “Don’t Panic”. Below we’ve summarized an article (5 Things Investors Shouldn’t Do Now) on August 21st, 2015 by Jason Zweig, a columnist with the Wall Street Journal:

  • Don’t Fixate On The News: Historic studies have shown that fixating on the fluctuations in the short term makes it harder for investors to reach their long-term goals. In short, worrying about day-to-day movements almost ensures that emotion trumps strategy, leading to fewer investment gains.
  • Don’t Panic
  • Don’t Be Complacent: Track your investments closely. We are, as always, doing this for our clients. In addition to being well diversified, we are looking to “re-balance” portfolios.
  • Don’t Get Hung Up On The Talk Of A “Correction”: The last pullback of significance occurred in 2011, resulting in a 19% intra-year decline. Domestic markets for the following three years experienced good returns. These pullbacks often unearth “value” in the next investment opportunity.
  • Don’t Think You – Or Anyone Else – Knows What Will Happen Next: If someone tells you they know for certain what will happen next week or next month, they are either lying to you or to themselves. Market timing does not work; nobody is smart enough to repeatedly jump in and out of the market with success. Portfolio diversification and patience – and, above all, self-knowledge – are your best weapons against this irreducible uncertainty.

As your financial fiduciaries, we care deeply about your financial well-being, and it is in times like these that we must remain calm and refrain from making reactionary decisions that may be detrimental to your wealth. After all, we are in this together and our experienced team has seen this before. We are monitoring the situation closely and looking for re-balancing opportunities that may add value to your portfolio. As always, please do not hesitate to contact us if you have any questions or concerns.

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