The Steward Approach to Managing Market Volatility
Over the past few months, investor concerns about rising interest rates, oil prices, tech stocks, trade wars and a variety of other daily “headline issues” have resulted in significant market volatility. Looking ahead, volatility may continue as markets adjust to potentially higher inflation and interest rates. To help frame the current market volatility, we offer the following reminders:
Keep Volatility in Perspective
It’s important to remember that investment volatility is a fact of life, and the current environment is nothing new. The recent bull market has been one of the longest in history, and we have become used to ever-expanding markets with very little “noise.” By contrast, this makes the recent return of volatility seem particularly frightening.
Actually, even our current bull market has seen five separate corrections where the S&P 500 declined more than 10%. Since World War II there have been 56 “pullbacks” (declines of 5% to 9.9%), 22 corrections (10% to 19.9% selloffs), and 12 bear markets. On average, pullbacks occur once a year, corrections every 2.8 years, and bear markets nearly every five years.
Through all this volatility, investors who remained steadfast and focused on the long term prospered. As of November 16, 2018 the S&P 500 index had gained over 390%, including dividends, since the depths of the Great Recession in March of 2009. For more context, consider that in September 1945, the end of World War II, the S&P 500’s value was under $16. Today, its value is over $2,600.
Emotions run high when markets rise or fall significantly, and we don’t know when market changes will occur or how long they will last. Therefore, the best plan is to focus on the long term and make sure the building blocks of your investment portfolio are in place to help you achieve your goals. Decisions made in a highly charged environment are often not the best.
Build a Diversified Portfolio
Times like these are exactly why we recommend diversified portfolios with assets that can buffer market drops. As we watch the Dow or the S&P 500 rise and fall it’s easy to forget that we are watching only US stock market performance. Our portfolios include a variety other asset classes, some that behave quite differently from stocks under various market conditions. For example, the stock market is down significantly over the past month, but the Barclay’s Aggregate Bond index and Dow Jones US Real Estate index both show positive gains. Including “non-correlated holdings” like these and others may offset or minimize the impact of stock market losses.
Have a Plan – and Stick to It
At Steward Advisors we develop a written Investment Policy Statement for all clients. It serves as a guide for making disciplined investment decisions. It’s hard to see the big picture “in the moment,” so developing a thoughtful investment policy ahead of time helps us make better decisions during stressful (or euphoric) times when markets are moving fast. Having the discipline to stick with the investment policy may result in buying or selling at a point in the market where such a move seems counterintuitive, but we believe a disciplined approach beats trying to predict the market in the long run.
In you have any questions or would like a complimentary portfolio review please feel free to contact us.