Reflections on 2018 and the stock markets renewed volatility…

If you were a member of the popular press, you’d probably be happy with 2018’s first quarter performance. At last – some volatility fueling news1 in early February, with plenty of enticing “largest,” “fastest,” and “worst” market superlatives to savor after a long, languid lull.

As usual, there are plenty of potential culprits to point to among current events: global trade wars heating up, the arrival of quantitative tightening (rising interest rates), troubles in tech-land over data privacy concerns, ongoing Brexit talks, and some interesting events over in the Koreas. At quarter-end, one hopeful journalist asked, “Is the Bear Market Here Yet?”2 Another observed: “[T]he number of [Dow Jones Industrial Average] sessions with a 1% move so far in 2018 are more than double 2017’s tally, and it isn’t even April.”3

Has the coverage left you wondering about your investments? Most markets have been steaming ahead so well for so long, even a modest misstep may have you questioning whether you should “do something,” in case the ride gets rougher still.

If we’ve done our job of preparing clients and their portfolio for market jitters, clients may might be able to cite back to us why they’ve already done all they can do to manage the volatility, and why it’s ultimately expected to be good news for evidence-based investors anyway. Remember, if there were never any real market risk, you couldn’t expect extra returns for your risk tolerance.

That said, you may have forgotten – or never experienced – how awful the last round of extreme volatility felt during the Great Recession. Insights from behavioral finance tell us that our brain’s ingrained biases cause us to gloss over those painful times, and panic all over again when they recur, long before our rational resolve has time to kick in.

If you noticed the news, but you’re okay with where you’re at, that’s great. If the volatility is bothering you, talk to a CFP® professional or other qualified financial professional; it may help ease your angst. If you continue to struggle with whether you made the right decisions during quieter markets, plan a rational shift to better reflect your real risk tolerances and cash-flow requirements. Not only is your peace of mind at least as important as the dollars in your account, you could end up worse off if you’ve taken on more risk than you can bear in pursuit of higher expected returns.

As Wall Street Journal columnist Jason Zweig said during the February dip: “A happy few investors … may have long-term thinking built into them by nature. The rest of us have to cultivate it by nurture.”  We couldn’t agree more, and we consider it our duty and privilege to advise you accordingly, through every market hiccup.

The market isn’t misbehaving, people are…

If we’ve been doing our job as your fiduciary advisor, you might already be able to guess what our take is on current market news: Unless your personal goals have changed, stay the course according to your personal plan. Have you checked your plan progress in the last couple of days?  If not, you should.

Still it never hurts to repeat this steadfast advice during periodic market downturns. We understand that thinking about scary markets isn’t the same as experiencing them.  No matter what happens next, context is always helpful to better understand what is happening around you.  This article today by Neil Irwin in the New York Times does a great job of giving context.

Good news is bad news?

So, what’s going on? Why did U.S. stock prices suddenly drop after such a long, lazy lull, with no obvious calamity to have set off the alarms?  As Financial Planning guest columnist Kimberly Foss, CFP® described: “To understand the anxiety that led to many investors rushing to sell last week, you need to follow some tortuous logic. … If American workers are getting paid more, then companies will start charging more for whatever they produce or do, which might boost inflation. ‘Might’ is the operative word.”

“Good news, it seems, is bad news again,” this Wall Street Journal columnist added.

Context and Action

While these sentiments may suggest the catalyst for the current drop, they do not inform us of what will happen next. Sometimes, market setbacks are over and forgotten in days. Other times, they more sorely test our resolve with their length and severity. As Jason Zweig of The Wall Street Journal pointed out yesterday, ‘The stock market didn’t get tested – You did.’  You must understand that the four most expensive words in finance are, ‘This time it’s different.’  We can’t yet know how current events will play out, but we do know this:

1) The (US) stock market goes up more than it goes down. Do you see now why we emphasize the wisdom of long-term?2) Capital markets have exhibited an upward trajectory over the long-term, yielding positive, inflation-beating returns to those who have stayed put for the ride.

3) If you instead try to time your optimal market exit and entry points, you’ll have to be correct twice to expect to come out ahead; you must get out and back in at the right times.

4) Every trade, whether it works or not, costs real money.

5) Volatility creates opportunity for the long-term investor.

For a longer explanation of #5, see my post from just last week on Strategic Rebalancing.  In short, the stock market roller coaster is too unsettling for some investors, who sell when they experience a market lurch.  Don’t be ‘that guy.’  However, this does give long-term investors a valuable—and frequent—opportunity to buy stocks on sale.  That, in turn, lowers the average cost of the stocks in your portfolio, which can be a boost to your long-term returns.

Ignore the Hype

Please, please, please be smarter than the marketers.  Be wary of hyperbolic headlines bearing superlatives such as “the biggest plunge since …” While the numbers may be technically accurate, they are framed to frighten rather than enlighten you, grabbing your attention at the expense of the more boring news on how to simply remain a successful, long-term investor.  And they have absolutely nothing to do with whether your personal financial plan is still on track.  (Not sure if your plan is on track or not?  Send me an email here and I would be happy to talk to you about the tools we use to help answer this question on a daily basis.)

Instead of fretting over meaningless milestones or trying to second-guess what U.S. economics might do to stocks, bonds and inflation, we believe the more important point is this: Market corrections are normal – and essential to generating expected long-term returns.  In short, before you consider changing course if the markets continue to decline, of course we hope you’ll be in touch with us first.  Oh, and turn off the TV.