Just a quick comment because of the volatility to start the year. As of today’s close the S&P 500 is down about 6.7% since the beginning of the year. Understandably this decline injects fear into a market that has been anxious since the Shanghai Index’s swoon last year. The S&P 500 is used as a barometer of the stock market, but what should be noted is that, as investment managers, we broadly diversify portfolios and do not invest strictly in the S&P 500. As a result, volatility is lower.
The recent pervasive fear is similar to what we experienced late in 2014. If you recall, in 2014 equity markets hit two speed bumps: the spring sell-off in internet and biotech stocks and the fall decline in global risk assets on growth fears. If you sold out of your long-term investment plan during these periods, you made a mistake. Jumping in and out of the market is the biggest threat to reaching your goals. Unfortunately, discerning quick corrections from disastrous sell-offs is only possible long after the fact.
Fear and greed move the markets in the short term, and as we know, fear is a quicker motivator and many times it leads to irrational decisions. The slowing growth in China and the low price of oil are the main catalysts of today’s anxiety. Both concerns seem to be overblown, as China’s work to stimulate their economy is starting to bear fruit and, here in the US, we should be net beneficiaries of lower energy prices since we consume twice as much energy as we produce.
Because fear and greed are short-term market drivers, quantifying their impact is unachievable and makes effective market timing impossible. This is why it is important to build a well-diversified durable portfolio, one that can weather the good times as well as the storms. As a result, portfolios will always have winners and losers, but this year’s winners could be next year’s losers and vice versa. So far this year most growth assets are down, while most fixed income assets are up. In addition, risk management strategies are doing exactly what they are supposed to do—protect on the downside and lower the risk.
Don’t confuse short-term volatility with risk. There are always reasons to sit on the sidelines and always reasons to invest. When the reasons to divest outweigh the reasons to invest, it’s generally when money is made. If you are considering bailing out of your investment program, you either expect too much from market timing or have taken on risk beyond your tolerance. (You are probably also checking your account balance far too often.) Either way, it may be a good time to go over your investment plan and determine if your assets are best positioned to meet your objectives.
As I mentioned in my last blog, I will have a more thorough discussion on the issues facing us in 2016 in my next blog.
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Washington Trust Bank.