October was certainly a trying month for investors. While we all understand that markets can move in both directions, downward moves always attract far more of our time & attention and lead to significant questions and concerns. Media outlets do their best to explain the moves, predict the future, and create as many shocking headlines as possible. While interesting, such analysis is not always helpful. Let’s take a look at what we know for sure - and consider where we go from here.
What We Know For Sure
1) Stocks go down much faster than they rise - but they go up more often than they go down
Downward moves always feel drastic and sharp - far faster than the period during which markets rise. However, it’s important to know that on average, since 1960, the S&P has seen annual gains 75% of the time. Three out of four years have seen gains in the US equity market. So, while they may fall at a faster pace than they rise, they go up more than they go down
2) Intra year declines are common
Intra year downward moves aren’t all that unique either over time. Since 1900, the Dow Jones Industrial Average has fallen 5%+ about three times per year, 10%+ once per year, 15% once every two years, and 20% once every three years. On average, such declines are less than a year - often times just a few months - but they do happen much more frequently than we remember
3) Uncertainty remains - but businesses are moving forward
There is no doubt that there is a sizable level of uncertainty in the markets, namely as it relates to trade, elections, and interest rate levels. The resolution of these items will impact the future trajectory of the businesses that comprise the market. However, we’d suggest that uncertainty is always present somewhere in the world, economy, and markets. We are just far more aware of these items than we ever were in the past - whether it be from 24/7 business news or the President’s twitter feed. Despite these macro uncertainties, businesses are operating every day - moving forward to drive revenue and innovation. Revenues and earnings growth showed great strength in the most recent quarter and guidance on the whole was also strong. This is where the certainty lies
4) Panic isn’t a strategy
It’s human nature to want to take action. We are instinctually driven to react in times when we are fearful and uncertain. But please remember - panic is not a strategy. We have put diversified portfolios in place and will continue to rebalance against them. Equity portfolios are comprised of high quality businesses that have sufficient cash flow and low leverage to withstand economic weakness should it arise. Best strategy is to stay invested and engaged. Reach out anytime and we will go thru your specific situation with you. Now is not the time to panic.
Where We Go From Here
1) Focus forward - as we mentioned above, now is not the time panic and move to cash. Revisit your overall financial plan and remind yourself of the progress you’ve made up until this point - and the path to get you to your ultimate goals. Stay the course and remember, these moves are part of the process.
2) Balance towards targets - diversification has been shown to insulate portfolios from some volatility. Continual rebalance against these targets, as well as adjustments to exposure within the asset classes to match the environment we are in, are advised
3) Active management opportunity - sharp downward moves in markets tend to impact every business indiscriminately. As a result, many companies are now trading at very attractive prices that build in attractive margins on safety. As a result, it is our prediction that active management will once again shine versus passive/ETF index investments. (Note: Consider this in context of your overall portfolio and specific allocation/risk tolerance)
4) International component - International markets have struggled in 2018, far more than US markets. This again may present an opportunity to add diversification at very attractive valuations. (Note: an allocation to international should be carefully evaluated in context of your portfolio as a whole)
5) Continue to save - Dollar cost averaging (ie: investing at various points in the market) has been proven over time to be a very sound strategy. Investing markets are one of the only “shops” in the world where people prefer to buy when things are expensive and sell when things are cheap. Fight against that urge - continue to save and invest at all market levels - including today’s
6) Reach out - You don’t have to do this alone. We know this is jarring and we know how much your portfolios mean to you. We feel the exact same way and are here to work thru this - together.
None of us want to experience market declines. They test our conviction and lead to increased worry and concern. But as we all know, we can’t control or predict markets - and opportunities are often the greatest in markets such as these. We will continue to apply a disciplined and informed approach to manage thru these times and to ultimately stay the course. It may not feel like it now, but this too shall pass. We are here to answer any questions you have and we will move forward - together.