Now that we have had the opportunity to learn more about the potential direction in Washington, we wanted to expand on one issue investors may have to deal with soon – volatility.
As of late, the S&P 500, the Dow Jones Industrial Average and NASDAQ have reached record highs. Whenever this happens, many investors are on edge, wondering if a correction is coming and, if so, what they should do about it.
We believe that markets may see a correction (a decline of 10-15 percent) at some point in 2017. The reason, however, may not be what you’d expect. We don’t believe markets are overvalued and/or need to correct at current levels. However, we do feel investors are going to deal with a lot more volatility in the near future than they have recently.
Stock market corrections are a normal part of investing. Since World War II, the stock market has, on average, experienced a correction every 10 months. Over the past eight years, we have only experienced three corrections in markets as measured by the S&P 500 Index (Morningstar Direct as of 12/31/2016). Using the number of corrections as a measure of market volatility, we could infer that markets have been over 30 percent less volatile over the past eight years.
In our opinion, one of the major side effects of the proposed policies coming out of Washington D.C. will be increased volatility in the stock market. Even if things go back to a “normal” amount of volatility, the markets will be over 30 percent more volatile than what we have experienced for the past eight years.
So yes, we feel a correction may be on the horizon – corrections are a normal event in the stock market. We may have simply forgotten this due to the relatively calm environment of the last eight years.
So, given this outlook, what is an investor to do? Legendary investor Benjamin Graham once wrote, “The investor’s chief problem – and even his worst enemy – is likely to be himself.”
We take those words to heart! Reacting to the market can hurt the performance of your accounts in the long run. For example, if you would have invested $1,000 into the S&P 500 Index at the beginning of 1970 and did nothing but leave it there until the end of 2015, it would be worth $89,678. If, during that time period, you tried to “time” the market and had your money out of stocks during the five single best days for markets during that time period, your investment would have grown to just $58,214. If you missed the 25 best single days, your investment would be worth just $21,224 (Dimensional Investor Discipline Presentation).
To build wealth, we believe in looking beyond the concerns of today and investing for the long-term. We also believe that no one can reliably forecast the market’s direction or predict which stock or investment manager will outperform. So, what can investors control to maximize returns?
- Create an investment plan to fit your needs and risk tolerance;
- Diversify broadly to minimize risk;
- Rebalance on a consistent basis to take advantage of market ups and downs;
- Reduce expenses and turnover in your portfolio;
- Minimize the effect of taxes on your investments.
A financial advisor can be your best ally in accomplishing these things.
Todd Pisarczyk is the founder of the Vancouver-based investment management and financial planning firm Sustainable Wealth Management. He specializes in asset management and financial, retirement income and estate planning. Pisarczyk can be reached at todd@sustainablewealthmgt.com.
The above comments are based on the current market environment and are not intended to be a forecast of future events or be relied upon as an investment recommendation.
