Volatility…What to Do?

January 8, 2016

 

The new year is upon us and what a start it has been for the markets.  The market has declined significantly in the first week of 2016 with the Dow -6.21%, S&P 500 -5.98%, and the NASDAQ -7.26%[1].

 

2015 was full of uncertainties and 2016 is no different.  China, the world’s second largest economy, seems to be slowing with the government setting a target growth rate of 6.5% for 2016, half of what it was in 2010 (Driebusch, Corrie & Gold, Riva. “China’s Woes Reverberate”. The Wall Street Journal 8 Jan. 2016: A1-A8. Print).  Oil prices continue to drop to levels not seen for some time and the Federal Reserve has set a policy to raise rates; however, it is unclear how fast it will happen.  We are currently riddled with the unknowns and simply put, uncertainty in the short term creates volatility.  So, what should you do during such turbulent times?

  1. Slow down and think rationally.  When markets are moving as they are it is difficult to watch your account drop.  Your first reaction, “sell…I need to sell”.  When you feel like this, stop and look at the big picture.  For example, over the last 35 years, the intra-year decline in the S&P 500 is roughly 14%.  But, despite the 14% intra-year decline the S&P 500 has closed positively 27 out of the 35 years, 77% of the time (JP Morgan Asset Management. “Guide to the Markets”.  Jun 2015: 13. Online.).  What does this mean?  Keep in the market, it is never a straight line up.
     

  2. Change your view.  Instead of viewing the recent market decline as a must-sell horrible situation, view it as a buying opportunity.  When the markets begin to sell based on macro-economic data, this usually means that individual companies are being sold irrationally creating an opportunity to buy.  For example, if the S&P 500 has dropped -6.21% think of it is as the price of the new pair of shoes (or fishing lure for me) you want and dropping by the same amount.  Why not purchase those shoes at a discount?
     

  3. Repeat after me…Long-term…Long-term.  Every investor is different with varying needs and risk tolerance, but an investor should view the market as an investment for the long-term.  For example, if an individual invested $10,000 starting January 3, 1995 till December 31, 2014 and stayed fully invested throughout the time they would have ended with $65,453.  Now, if the same individual missed the market’s 10 best days throughout that timeframe they would have ended with $32,665 (JP Morgan Asset Management. “Guide to Retirement”.  Jun 2015: 33. Online.).  Note that six of the 10 best days occurred within two weeks of the 10 worst days.  Also, according to Morngstar.com through 2013 a typical investor returned an average of 4.8% while the fund returned an average of 7.3% (Kinnel, Russell. “Mind the Gap 2015.” MorningstarAdvisor. 11 Aug. 2015. Web. 08 Jan. 2016).  The discrepancy shows getting in and out of the market in times of volatility can be costly.  What does this mean?  In the short-term, the market is volatile and unpredictable, but in the long-term it is easier to predict and understand.  Be patient and think long-term.

In conclusion, when the market is experiencing volatility stay calm and think long-term.  Stay true to your investment strategy; there will always be bumps in the road if you are invested in the market.  During such volatile times LBW seeks for opportunities that have been mispriced.  We are long-term investors meaning five years is when long-term truly begins.

 

 

Sincerely,

 

LBW

 

[1] Source: http://markets.wsj.com/.  Data is approximate as it is real time at the close of January 8, 2015.

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