I am sure that it would be fair to say that some clients may have experienced a bit of a shock when opening their statements or viewing their accounts online recently. It has been several years since we have seen a month with markets as volatile as they have been this past October. It isn’t too late, however, for the recent volatility seen to revert to its seasonal pattern. November and December are historically the strongest months of the year - both in terms of actual returns, and in the probability of positive returns. In fact, since 1950, December has noted positive returns 74% of the time.
Conditions that led to last month’s market volatility appear to be based on a slowing Chinese economy, peaking earnings growth both at home and abroad, a drop in oil prices, tighter financial conditions due to increasing interest rates, and recessionary concerns.
If the focus is put on fundamentals, it can be noted that, fundamentally, nothing has changed as far as the global economy is concerned. Typical signs of a recession include inverted yield curves, manufacturing hitting new lows, housing starts declining, labor market weakening, and leading economic indicators being negative. When looking at the current economy we are not seeing any of these indicators at play therefore I do not anticipate the recent market volatility to be indicative of the potential of a longer term bear market.
Instinctually, the thought of a decline in value may have some worry and think about “getting out of the market and waiting out the volatility" on the sidelines. I have written this before and will write it again: history shows this decision is the most classic mistake investors make. Most successful investors and money managers share the same philosophy, which is what makes them successful in the long term.
Volatility is not a risk, it is a certainty. Corrections are part and parcel of the investment process. They come and go, and it is imperative to take a deep breath and realize that what is most important for building wealth is not 'timing' the market but rather 'time in' the market. The time in the market is crucial, especially when things get scary for investors. When volatility picks up, it's tempting to trade in and out of the market with the hope you'll protect your wealth. Unfortunately, this increases the risk you'll miss some of the best days in the market. And that can be very costly as the following chart illustrates:
Putting things into perspective, we can identify that if a company like Gillette's stock price were to fall by 30%, it certainly does not mean that people will stop buying razors or its other products. The fundamentals basics of the business haven't changed. A well run valuable company will remain a well-run valuable company regardless of short term stock price changes. This brings me to the most important point:
You must learn to separate the stock price from the underlying business. They have very little to do with each other over the short-term.
Once we understand this, we will see falling stock markets like a clearance sale at your favorite furniture store: load up on the good deals while you can, because history has borne out that prices will eventually return to more reasonable levels.
It may sound to you like I am encouraging you to invest more into the market right now, and certainly it would be advantageous to buy in at lower prices than higher. However, as my clients know, any recommendations I make to you are always based on each individual’s circumstances, objectives and current portfolio structure.
Market lows often result in emotional decision making. Daily reporting by the news and business outlets only lead to increased worry and panic. At Insightful Wealth Group, we believe investing for the long-term while managing volatility can result in a better outcome. We manage your assets based on an investment policy statement and overall asset allocation strategy with the intent to minimize your volatility based on your tolerance to that volatility.