The past couple of months have been volatile to say the least. The phone calls and emails have been at much higher volumes. And the initial signs of panic are showing with some investors. Others are taking the volatility in stride. In fact, it is most easy to equate it to a solid estate plan. When figuring out how to transition assets to the next generation, who controls those assets, and when those transfers occur takes considerable planning. Then you make minor tweaks, but stick with it for the long haul.
This is similar to how advisers work with clients in regards to the assets they manage, or the 401(k)s they advise on – a plan is created, with goals and risk tolerances in mind, minor tweaks are made along the way, but staying with the plan is the intent.
Someone’s intent and someone’s actual actions tend to bifurcate in volatile markets and advisers usually try to have calming discussions around frequency, timing and intent. After reiterating the goals that were established in normal times, we dive into the timing of markets and why volatility increased. This time is no different. The market weakness does not appear to be associated with any one event, but rather seems to be the result of a few factors:
- Uncertainty around the timing of Fed rate increase and whether that is good or bad for the economy and should it happen now.
- China slowing and the weakness around other emerging markets (EM) have people scared. Will we see a devaluation of currencies in more EM countries?
- And a general vacuum of news. These two weeks are some of the slowest each year. Vacation is at its peak in the northeast and there is a lack of data points released that have a meaningful impact on the economy right now.
- Macro related issues such as Korean tensions, Russian forces near Ukraine, and Iran nuclear deal (and the corresponding glut of oil that could flood the market).
It has been 1,413 calendar days since the last 10 percent correction, and these normally occur every 18 months – we are due. It is not uncommon to have at least a 5 percent correction. In fact, it has been 20 years since we went without at least a 5 percent correction in a calendar year. Often – as seen below – corrections rebound and finish the year on a positive note. Some of the best days occur within the volatile days.
Inevitably wanting to time the market is a knee jerk reaction to increased volatility. Remember, the market is everyone else, and if you believe information is efficient, then you are claiming you are smarter than everyone else. Needless to say, most investors are not good at predicting short-term swings in the market.
It is not uncommon for investors to find themselves buying high and selling low. And when the market starts selling off sharply, investors will panic, sell their own shares, and sit on the sidelines. This actually increases the risk of lower returns in the long run.
Unfortunately, some of the biggest one-day upswings in the market occur during these volatile periods.
For instance, if an investor stayed fully invested in the S&P 500 from 1993 to 2013, they would have had a 9.2 percent annualized return. However, if trading resulted in them missing just the 10 best days during that same period, then those annualized returns would collapse to 5.4 percent. Missing these days do so much damage because those missed gains aren’t able to compound during the rest of the investment holding period.
So, in closing, the markets are by nature volatile. Stick with the plan. World events and low volume can exacerbate market swings, and staying invested is paramount. Talk with your adviser as this may be a good time to capture some losses to offset any realized gains. Large corrections may be great times to invest additional capital.
Large market pullbacks allow individuals a chance to gift more shares at lower prices to the next generation. There are plenty of estate techniques that benefit from temporarily lower assets prices, such as GRATS, IRA to Roth IRA conversions, and discounts of entities that hold marketable securities. Travis S. Anderson