A Letter to Clients: Wow, What a Week
Well, this has been quite a week from a stock market perspective. We haven’t seen this kind of volatility in some time. I wanted to send a quick note and remind you that this was completely expected. As nerve-racking as it is, if your financial goals, risk tolerance and portfolio are well aligned, then you and I are more than prepared to withstand the volatility. Given the amount of time that has passed since the last market adjustment, this may seem out of the ordinary. However, it is important to remember that in terms of percentages, we have experienced market declines similar and even worse in the past. As we saw in 2008/2009, having a long-term systematic approach is helpful, especially in times like these even though it may test an investor’s patience. In case you missed it, Nela was recently interviewed by Channel 7 News about the market drop and reiterated what I’m saying here.
One of my favorite graphs from this week is this one that a colleague shared from Carl Richards at Behavior Gap. While we get used to times of steady growth or what seems normal, we forget that generally many things in life, including the capital markets, are a bit tumultuous. Fortunately, we know this and take it into consideration when developing financial plans and portfolio allocations. It is already factored into our expected returns. This is a fun and simple chart that drives to the point clearly.
One of my favorite headlines from this week is from Jason Zwieg, who blogged in the Wall Street Journal that “The Stock Market Didn’t Get Tested – You Did”. He commented that the stock market has been so smooth and has seen such a steady rise, that investors were set up for this type of shock and awe reaction. The kind of drops we have seen this week were once relatively routine, but our recent history has distorted our perception of market volatility. Emotions and crowd mentality quickly kicks in and drives even more volatility and uncertainty.
Let’s put what is happening in perspective. The S&P 500 Price Index returned 18.74% in 2017. Some investors had better returns, while others had lower, depending on their risk and portfolio allocation. Since the beginning of this year, the S&P 500 Index is only down approximately 2%. If you watch the news or read the headlines, you’ll note how they harp on about the big point drop in the Dow Jones, and use shock tactics to get at our emotions. First of the all, the Dow Jones is an index with 30 stocks! This is hardly representative of the market in general and does not take into consideration the benefit of diversification and having a risk adjusted portfolio. The S&P is a much better index to review, but even so not necessarily representative of the return in your portfolio. A quick scan of our client portfolios shows that on average, we are down less relative to the general stock market.
We don’t normally write or talk much about the daily workings of the stock market. But I know that you are all thinking about it, and that makes perfect sense. However, I remind you again that investing is a long-term game. The priority is to have a clear vision of your goals and an investment strategy that will help you achieve those goals. Over the last 27 years, if an investor had pulled out of the market during down days and missed the single best return days, their overall performance would have been much different. Over this period, the S&P 500 index has returned 9.8%. Had you sat out the best 25 days over that 27-year period, the return would have been 4.53%. A decline in performance of over 50%. Trying to time the market is not the best idea. Here is a graph that demonstrates the performance if you had sat out of the best single days from 1990 to 2017.
While market volatility can be nerve-racking for investors, reacting emotionally and changing long-term investment strategies in response to short-term declines could prove more harmful than helpful. By adhering to a prudent investment plan, we may be better able to remain calm during periods of short-term uncertainty. This isn’t the first time you are hearing this from any of us here at Tobias Financial Advisors, but a reminder never hurts! We remain positive about the fundamentals in our economy, in the opportunities in the emerging markets, and in the benefits of having a sound, diversified, risk-adjusted portfolio. If you have any concerns, want to discuss what is happening in the markets, or are just looking for a sounding board, please give us a call.