Investment Committee: Stay the CourseSubmitted by Connecticut Wealth Management, LLC on February 14th, 2018
Prior to early February, the S&P 500 index enjoyed its longest streak in history without a pullback of at least 5%, but after more than 18 months of nearly uninterrupted advances, over the last two weeks volatility in the stock market has increased considerably. This long period of market calm is actually more unique than this recent perceived instability. Regardless of what has caused this current turbulence (most agree that investors are reacting to fears of heightened inflation), we suggest that the key to surviving these downturns is simply to be aware that they will occur and to remember that your portfolio, as a result of all the planning work that we do, is designed to weather these exact types of events. After years of relative underperformance from bonds compared to their stock counterparts, times like these remind us of why we adhere to a target asset allocation as a function of your cash flow needs. A balanced portfolio gives us the intestinal fortitude to ride out periods of volatility.
We recognize that hearing the phrase “stay the course” can be a frustrating response when the value of your hard-earned money declines, but the odds of success from drastic market timing strategies are simply not compelling. While everyone would prefer to sell out of all positions at the top of a market cycle and buy back in at the bottom, any legitimate study indicates that it is nearly impossible to time this accurately, and investors who try to time the market end up worse off than if they had stuck to their allocation. On average, the market fully recovers from a correction of over 5% in 132 days and from declines of 10% or more within 365 days. Even in the worst market crashes, investors who stayed the course have always made their money back.
We would be remiss not to spend a few moments on the larger economic conditions that suggest solid fundamentals are still intact. Many of the elements discussed in our last blog post regarding potential benefits from tax reform are still in place, and many of the leading indicators that can help predict a recession still point to continued economic growth. In fact, we are looking closely at this recent volatility as a potential opportunity to buy stocks, not sell. As always, it is our responsibility to study and interpret economic and market data and make informed decisions, devoid of emotions, about how best to allocate your assets.
Finally, for those who might appreciate both simple graphical analysis and a touch of humor, we thought you might enjoy the two items below. Please feel free to reach out to us with any questions.