Is the market going to crash? If you read many of the headlines from this past week then you may believe yes. Certainly, stocks are having a terrible start to the new year with US stocks dropping over 6% and international stock markets dropping over 10% year-to-date. It is tempting to sell everything and go home! Yet, I would caution against assuming that every curve is a new trend. The markets will have ups and downs, and while I can’t predict the future, I am certain that volatility is here to stay, and volatility can lead to opportunity for the disciplined investor.
2016 is poised to be a year with more confusion, mixed signals and cross-currents than we have seen in the past few years. As a matter of fact, even though the past few months feel like a roller coaster ride, the truth is that we are just now returning to historical levels of volatility. While some call for investors to sell out after January’s drop, we believe that sort of market timing is exactly what leads to underperformance. For example, despite average intra-year drops of over 14%, the S&P 500 has had positive annual returns in 27 out of the past 36 years.
Investors that sell out at every drop start a cycle of destroying the very wealth that they have worked hard to create. We have previously discussed Carl Richards fear and greed cycle shown in the illustration below. If you buy when everything is good and sell when there is bad news, then you begin a cycle of buying high and selling low that leads to underperformance and can even lose money in up markets.
Don’t get me wrong, I am not saying that everything is wonderful in the global economy. Yes, the world is a scary place. As advisors, however, we didn’t just realize that the world is a scary place, we knew that the world was a scary place a year ago, six months ago, and two months ago. We develop strategies that are carefully constructed because the world is a scary place and we cannot know the future. Be wary if your financial advisor told you to invest in emerging markets 6 months ago because there was significant opportunity, and now that same advisor is telling you to move to cash because the world is scary - you are probably on the fear and greed cycle. Emerging markets have declined over 20% over the past 6 months. Doesn’t it make sense that they were actually riskier 6 months ago than they are today?
We believe that our job is to be strategic, data-driven, and disciplined rather than making decisions based on fear, greed, or the last economic sound bite. We develop strategies for our clients that are designed to weather the inevitable market storms while giving the returns they need to achieve their goals. By remaining disciplined, we can take advantage of these declines rather than selling into them. We help our clients get off the fear and greed cycle and give them peace of mind.
FactSet, Standard & Poor’s, J.P. Morgan Asset Management: Guide to the Markets as of December 31, 2015
Richards, Carl. "How Greed and Fear Kill Returns." The New York Times. March 24, 2010. http://bucks.blogs.nytimes.com/2010/03/24/how-greed-and-fear-kill-returns/