Courtesy of Financial Planner Garry Kachkovsky:
A stock market without volatility is like the Pacific Ocean without waves. At times, the surf can be gentle. At others, high tide with crashing waves can reach flood stage in low-lying coastal areas. The capital markets are constantly moving. During quiet periods, it’s important to remember that volatility is normal. History shows us that market pullbacks of 5% happen almost every three months, and 10% pullbacks typically occur once per year. Since 1980, the average intra-year drop is 14.2%. Despite this drop, the market ended the year positive 76% of the time.
For every action, there’s a reaction. While Newton applied this law in the physical world, it also holds true in the realm of human emotion. When we perceive things aren’t going our way, we react. And when coping with seemingly unpredictable returns, knowledge and time can be our allies. Typically, returns over short periods of time have been quite unpredictable, but things tend to become less volatile when you expand the time horizon to five years or more. It’s important not to jump ship due to short term gyrations in the market. A solid financial plan should give investors the confidence to ride out the waves of volatility.
Small frequent pullbacks or a large one from time to time can encourage market timing. However, investors should be careful. The worst and best days in the market tend to be clustered together. The best day of 2015 (August 26th) occurred only two days after the worst day (August 24th). The chart below illustrates the effects of missing some of best days in the market.
Performance of a $10,000 invested in the S&P 500 between January 1, 1997 and December 30, 2016. Six of the 10 best days occurred within two weeks of the 10 worst days:
12/31/16 Remained Fully Invested $43,933 Missed 10 best days $21,925 Missed 20 best days $13,662 Missed 30 best days $ 9,025 Missed 40 best days $ 6,132 Missed 50 best days $ 4,275 Missed 60 best days $ 3,050 This chart is for illustrative purposes only and does not represent the performance of any investment or group of investments. Source: J.P. Morgan Asset Management analysis using data from Bloomberg. Returns are based on the S&P 500 Total Return Index, an unmanaged, capitalization-weighted index that measures the performance of 500 large capitalization domestic stocks representing all major industries. Past performance is not indicative of future returns. An individual cannot invest directly in an index. Data as of December 31, 2016.
Periods of market volatility – especially pullbacks – can trigger emotional responses in investors. You may feel upset or worried. It happens. And it’s normal. Volatility can also appear as rapid upswings causing sometimes-unbridled euphoria that can also impact judgment. It’s important to make sure your asset allocation matches your risk tolerance. We feel the number one rule for investors is to have a sound plan. When you get scared, remember the plan. If your goals didn’t change, you probably shouldn’t change your plan. If you have the urge to change your portfolio, lie down until that urge goes away or call your financial advisor.
If you have questions regarding volatility or the capital markets, give Garry Kachkovsky a call at 858-450-9711 or email at garry@kachkovskyandfisher.com. Website: www.kachkovskyandfisher.com
Kachkovsky & Fisher is a Registered Investment Advisory Firm. This information is general in nature, is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. Investments and strategies mentioned may not be suitable for all investors. Past performance may not be indicative of future results. Investors should consider the investment objectives, risks, charges and expenses associated with savings plans before investing.
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Fiduciary – Under the Investment Advisor Act of 1940, an investment advisor has a fiduciary duty to clients – a fundamental obligation to always act in the clients’ best interests. In contrast to brokers, independent, fee-only RIAs are legally required to act as fiduciaries. Independent, fee-only advisors should also be more closely aligned with their clients because they are generally free from the conflicts, constraints and pressures that brokers face. Because we are independent, we are not bound to any specific investment products or family of funds. Whether you need assistance with retirement planning, a complicated tax situation, estate planning or borrowing, managing assets at multiple places, or intergenerational wealth transfer, we have the freedom to choose from a wide range of resources in order to tailor our advice based on what’s best for you.
It is regrettable, however, that this is the exception rather than the norm in the financial services industry because the majority of advisors are brokers who are not required to act as fiduciaries and are not held to a “fiduciary” standard. Some advisors are also “dually registered.” This means they act as fiduciaries at times and at other times act as brokers who are compensated in different ways for investment advice. This can be problematic because you’ll need to determine whether any advice you receive is for your benefit or because they will receive a commission on the sale of a specific investment.
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