Stock Market Volatility
Over the past few months there has been increasing volatility in the financial markets. Since three months ago today, the Dow Jones Industrial stock market average has gone down close to 10%. Many of the worst performing stocks have been in the Energy and Materials sectors. Much of the recent stock market weakness culminated in a headline grabbing 500 point drop in the Dow Jones Industrial Average today.
There have been very few safe havens with most investment categories either providing mediocre, negative, or deeply negative performance for this year to date. We can learn many important financial lessons by reflecting on all of the periods of instability we have seen over the past fifteen years. I have listed a few of them:
- Do not let emotions take over: Severe down periods in the stock market turn out to be very poor times to sell financial assets, but a wonderful opportunity to acquire them on sale. It seems obvious in retrospect that the US financial crisis was actually a good buying opportunity but it certainly did not feel that way at the time. A reason that Warren Buffett has been so successful is his contrarian outlook. He says, “be fearful when others are greedy, be greedy when others are fearful.” The best investors do not allow short term stock market selloffs to shake them from their long term plans.
- Stay well diversified: Owning investments with different risk/reward profiles and different correlations helps to create an enduring portfolio that can withstand and recover from any temporary downturns. Often the investments that perform the worst end up with some of the most attractive bargains. As an example, Financial stocks were the worst performing sector of the S&P 500 in 2011 (down about 17%), only to turn around and become the best performing sector of 2012 (up over 28%). We use data science and fundamental analysis to determine what we think is the right mix of assets. We take great care in composing a portfolio that can meet the long-term objectives of our clients and recover from temporary volatility.
- Focus on the big picture: With the wide adoption of the smartphone, we now have access to financial information and breaking news at all times of the day. It is easy to get sucked into the day to day minutia and miss the optimal choices that help to accomplish a long-term plan. The stock market is the ultimate humbling mechanism. I was a contributor to a Forbes article: on this topic. I remember speaking with a prospective client in early 2009 when the Dow Jones Industrial average was at 7,000. He did not want to invest at that time because a media prognosticator predicted that it would hit 6,000. It turned out the stock market did bottom out at about 4% lower in March of 2009. However, it has since turned around and is now up over 100% since it last traded at 7,000.
Over the next quarter our team will continue working carefully to make sure that your asset allocation and investment choices are appropriate. We will certainly be in touch if changes are necessary and welcome the opportunity to discuss any questions or concerns that you may have. We take the responsibility of managing your assets extremely seriously and we treat those funds with the same care as those of ourselves and our own families. As always, I look forward to being in touch soon.