Predicting an uncertain future is just an opinion and should not determine anyone’s investment decision. Many people learn this the hard way. Markets have always rewarded discipline – having an investment philosophy, a strategy to manage risk, and sticking to it is the surest way to reap success when investing. But at times like this, uncertainty creates doubt and fear. Investors feel exposed and ask themselves if they risk too much. There is risk in every aspect of life, even when it comes to investment decisions.
While our clients are not just invested in the US stock market and are not experiencing as much volatility as the S&P, they are still experiencing some unsettling volatility. How someone feels about risk depends upon their perspective. The performance of the markets can be wildly different from day to day and year to year. Volatility is normal. The graph below displays returns from 1979 through to last year. The blue bars show the return for the entire calendar year. The black and red whiskers show the most significant gain and decline each year. Even in years with high calendar-year returns, a significant intra-year decline may have occurred. Looking at this chart, it is interesting to note there are declines every year and greater than 10% in most years. Maintaining a long-term focus helps successful investors achieve a positive return over the long run.
US Market Intra-year Gains and Declines vs. Calendar Year Returns
Yet some people don’t understand this. Instead of approaching investing as a long-run proposition where you spend adequate time finding quality investments and an overall strategy to weather the storm, they approach investing from an emotional perspective. They act impulsively—and their reaction is typically sparked by fear or greed. Some may get anxious about the stock market and decide to get out. This may ease their fear, but it may be replaced by the anxiety of missing out on a market recovery. Investors who flee the market ultimately have to decide when to get back in.
The 2000–2010 market downturns show how the cycle of fear and greed can drive an investor’s decisions. Some investors fled the market in 2002 and again in early 2009, just before the rebound of each cycle began. They locked in their losses and then experienced the stress of watching the markets climb. While a successful investor will buy low and sell high, following emotional, impulsive decisions often yields the opposite effect: buying high and selling low.
Of course, we can’t blame the public. Many people do not have the education or experience to understand how the markets work fully. The media, who usually have no experience and are not educated in finance, take advantage of human emotion for entertainment and increased ratings. “Experts” peddling their “insights” as if they have a crystal ball and can predict the future are at best offering their opinion.
These opinions are guesstimates and are often wrong, but those looking for shortcuts to grow their wealth think this is the only way. Many people learn this the hard way. Instead, those who study the data know markets have always rewarded discipline. By investing using a solid investment philosophy and approach to mitigate risk and plan for market volatility, people can avoid the “insights” of the media, friends, and neighbor with their false promises. Growing wealth has no shortcut.
The chart below shows the performance of a balanced investment strategy following a few historical crises. Each crisis is labeled with the month, or year it occurred or peaked. The subsequent one-, three-and five-year annualized returns start from the first day of the month following each crisis. Although a global investment strategy would have suffered losses immediately following most of these events, the financial markets recovered over time, as indicated by the positive five-year cumulative returns. Adverse events such as these may tempt investors to flee the financial markets. But diversification and a long-term perspective can help investors apply discipline to ride out the storm.
There are many risks in your portfolio to consider. Your portfolio should be diversified by risk source. We encourage you not to lose sight of the ongoing dangers during volatile and quiet times. Make sure that you are discussing risk management with Atlas Fiduciary Financial and that you understand our philosophy and approach to risk management. Quarterly meetings and maintaining your financial plan help us monitor risk using standard measures and changes to Monte Carlo outcomes. This is why we consider quarterly, or at least annual, discussions related to risk significant in ensuring your financial success.
To be a successful investor, you need two things; (1) a strategy and (2) the discipline to adhere to the strategy.
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