Friday, April 24, 2015

Attention Investors: Don't Get Soft



Do you realize how easy investors have had it lately? There is almost always something happening in the world that can serve as justification for selling investment positions or not investing new dollars. Yet, there hasn’t been many spooky events impacting the markets during the last several months. Let’s examine the investment environment we’ve recently enjoyed.

There is almost always geopolitical current events that are capable of scaring investment markets. While this generation will always have concern about ISIS, North Korea, Iran, Afghanistan, and terrorism, we haven’t recently experienced the kind of negative political event that has immediately sent the stock market into a tailspin. Even stories regarding missile strikes in Gaza have been few and far between. The most relevant international political event of late is the United States’ increased cooperation with Raul Castro and Cuba -- a positive event.

Global economic situations also have the ability to increase volatility in the stock market. Yet, we haven’t recently been bombarded with headlines about excessive debt in Argentina or other countries on the doorstep of financial collapse. Actually, international markets are the big investment story thus far in 2015, with Europe, Asia, and emerging markets outperforming U.S. stocks.

Social tragedies also have the ability to move the markets. I believe the most dominant story regarding social issues of late has been the horrific stories of potential racism and excessive police violence. Of course, these events are shocking and unfortunate, but they aren’t usually the type of stories that impact investment markets. Fortunately, I’m not aware of any school shootings, mass suicides, or broad violent attacks on U.S. soil that have caused a national mourning in 2015. 

Further, there have been relatively few natural disasters such as hurricanes, earthquakes, or tornados that have significantly set back a geographic area or the nation as a whole. In fact, the Weather Channel announced that the tornado count is 59 percent below average year-to-date. There were some large snow storms in the North-East earlier this year, but they had a nominal impact on the direction of the stock market.

Even the U.S. economy hasn’t produced any data that has been particularly frightening to investors. It was all the way back in October that the Federal Reserve announced the ending of its quantitative easing (QE) program, which caused some to wonder if the economy would start to dry up (it hasn’t…). The concern about potentially higher interest rates has been present for so long that it is now old news, and people seem less and less convinced that higher interest rates would significantly stall the economy. Meanwhile, the unemployment rate continues to decline.

Lastly, the stock market itself has hardly provided reason for heartburn. The total return of the S&P 500 has been positive every year since 2008. The index hasn’t even had a temporary pullback of more than -7.27% (9/18/14 – 10/16/14) since 2011, even though the market historically goes through a -10% correction approximately once per year, on average. In fact, the biggest investment concern of 2014 was that small cap and international stocks didn’t make as much as large cap stocks, causing most diversified portfolios to under-perform the larger market indexes such as the S&P 500 and Dow Jones Industrial Average. If your largest investing disappointment is that every part of your diversified portfolio didn’t perform as well as the best performing asset category in the market, you should really focus less on your portfolio and more on enjoying life as a whole.

When we examine the factors that typically lead to volatility in the market, we’ve had a relatively tame past couple of months. My purpose in pointing out this fact is not to imply that the market is in a prime position to continue to do well nor on the verge of dropping drastically when the next sign of uncertainty appears. I simply hope to remind investors that the stock market is not always such a smooth ride.

The most counter-productive action an investor can take is to liquidate their positions after the market drops. I believe the best way to avoid this mistake is to constantly remind yourself that you are investing for long-term results and that short-term (and potentially drastic) volatility is certain to occur. Reminding yourself of this fact now, before the volatility arrives, is likely to increase the probability that you will be able to stick to your long-term investment strategy during both the good and bad periods of market performance.

As Carl Richards points out in his new book The One-Page Financial Plan, no skydiver would try to figure out how a parachute works after jumping out of a plane. Sooner or later, an unfortunate event that will negatively impact the stock market is certain to occur. At that time, remember that just as it always has, the world will continue to turn. Further, remember that the longer you allow the world to turn, the more positive your investment results are likely to be. Don’t let this unusually quiet investment period make you more susceptible to short-term instability once it returns.

1 comment:

Paul Whitaker said...

I really like your analysis of the current market. It's good to remember that even though we might run into some bumps now and then, we've had it pretty good lately. Hopefully it can stay this way for a while longer. http://www.maddernfinancial.com.au/accountants/services-sub-page/24/Financial-Advice