End-of-Year Market Volatility Update

End-of-Year Market Volatility

Financial markets have moved dramatically for as long as stocks and bonds have existed.

Average total returns are often discussed, perhaps giving a false impression that these returns are the norm. But in reality, there have been only a few years that stocks and bonds have delivered returns close to the market average.

These market average returns come from long-term market performance. Only by staying the course will one benefit from the long-term market averages.

Investing = volatility. Remember, just stick to your plan.

How did you react when the stock market started its nose dive in October 2007?

That long, extreme market decline was unnerving for many investors. The key was to grit your teeth and stay the course. Those who did were rewarded by recouping all their losses and more.

Market Volatility Bounceback

The bottom line:

Ignore the ups and downs of the market and stick to your plan. It can be a better recipe for success.

Stick with your plan … even when the market gets scary

Changing your investment mix can backfire. As this illustration shows, the investor who moved a $100,000 portfolio to cash when the stock market bottomed in 2009 ended up with just $72,000 after the recovery, as of December 30, 2016. The investor who moved to an all-bond position had only $98,000. But the investor who stuck to a 50% stock/50% bond plan wound up with $171,000, more than double the all-cash investor.

Stick with your plan...even when the market gets scary

The bottom line:

Emotions and investing can be a losing combination. Don’t abandon your investment mix just because the market is uncertain.

Downside protection when investors need it the most

Seeking diversification to help mitigate the effect of volatility on their portfolios, investors often consider real estate investment trusts (REITs), commodities, and hedge funds, but they overlook high-quality bonds,* which just might be the Rodney Dangerfields of the investment world. They don’t get any respect.

The chart below demonstrates various investments’ track records during turbulent periods for equity markets. By sorting monthly equity returns into deciles and examining the worst periods, we find that high-quality bonds have proved to be one of the best diversifiers for a portfolio.

Market Downside Protection

The bottom line:

High-quality bonds remain effective portfolio diversifiers, especially during sharp equity market declines, and they deserve more respect.

What to do now?

Ignore the ups and downs of the market and stick to your plan. You don’t want to panic, some of the best days of the market have occurred right along the worst market days.

We want you to be confident that you have the right mix of stocks and bonds in your portfolio for your level of risk. If you want to re-evaluate your asset allocation, give us a call.