Ride out market downturns

Two stories dominated the financial news last quarter — the stock market’s August volatility and the Fed’s September meeting on interest rates. Investors were bombarded on a daily, sometimes even hourly, basis with anxiety-producing commentary about the state of the markets and the impact of the Federal Open Market Committee’s weighty decision.

Worry can be contagious, and the constant coverage of these events may have left you with questions. What does the sharp sell-off in many emerging markets, largely spurred by concern over China, mean for developed markets? When will U.S. stocks make up the steep decline from their correction-like swoon? What will happen when interest rates rise? What does it all mean for my portfolio? And the real kicker: What should I do?

News outlets dedicated airtime, ink and server space purporting to dissect, assess and predict what the market (or Fed chair Janet Yellen) would do next. But what was the net effect to investors who managed to ignore the media noise, opting instead simply to continue to follow their long-term plans? They didn’t panic and sell low, closely followed by an attempt to guess whether it was time to “get off the sidelines and buy back in.” They didn’t have to sift through competing “advice” and determine which “guru” would get lucky and make the right forecast. Such investors were, instead, afforded an opportunity to rebalance as appropriate, taking advantage of carefully designed buy-low, sell-high discipline. They may also have had chances to harvest tax losses. In short, they could remain focused on what they can control — their long-term goals and what’s most important to them.

“Since no one can time market downturns,
our advice, as always, is to ride them out.”

That’s not to say the quarter’s volatility has been easy to stomach. The Dow lost 6.6 percent in August, its largest monthly percentage decline since May 2010. The S&P; 500 dropped 6.3 percent and the Nasdaq fell 6.9 percent, the biggest monthly percentage losses for both since May 2012. But it’s important to remember that you are a long-term investor with a long-term investment plan. Current market conditions are part of normal market cycles and, while not enjoyable, are to be expected. Stock markets have been and always will be risky. This additional risk, however, is commensurate with the higher expected returns of stocks relative to bonds. Since no one can time market downturns, our advice, as always, is to ride them out. While this approach can be challenging to maintain in periods such as these, the academically developed, objectively vetted evidence shows overwhelmingly that it is the surest path to achieving your financial goals.

BikersOn the fixed income side, unstable financial markets, a weak global economy and persistently low inflation convinced the Fed not to raise interest rates. Yellen did say a rate hike is still likely this year. But there’s no evidence that bond market forecasters can predict interest rates any more accurately than the market can. And the securities markets continually evaluate and incorporate countless news releases and any number of other relevant factors, including the likelihood of higher interest rates, into current prices.

A written, well-designed investment plan, should be based on one’s willingness, ability and need to assume market risk, and should factor in events like market downturns and interest rate increases. Despite what the securities industry and the financial media would have us all to believe, sticking to your strategy — maintaining discipline and diversification while adhering to your investment and asset allocation plan — is usually the right decision.

Let us help you make sense of the media noise, sort through the clutter and weather the market’s uncertainties with peace of mind. That’s the promise of true wealth management.