Mr. Market Gives Us a Reminder

By: Ted Black, CFP©
Spring 2018 (Vol. 36, No. 1)

A long running Bull market can lead to investor complacency, which can sometimes result in unintended consequences. That’s why we feel its import for every investor to carefully and realistically consider their investment time horizon and propensity to tolerate large swings in the value of their investments. Although the financial markets offer no guarantees and have a long history of surprising us, a solid understanding of one’s personal financial situation and risk tolerance can go a long way in helping construct an investment portfolio that reflects one’s short and long-term investment goals, and that can survive the inevitable ups and downs in the market.

Prior to the correction that started in late January of this year, the major domestic stock market indexes had gone more than 15 months without a 5% pullback, which is quite an admirable run. Recently, Mr. Market gave us a reminder that in fact the stock market does move in both directions … and sometimes it can move quite rapidly. From January 26th through February 8th, a total of 9 trading sessions, the S&P 500 Index® fell 10.2%. Included in that period was a particularly dramatic day that saw the Dow Jones Industrial Average® lose more than 1,175 points, the largest single day point decline in history.

As of this writing, the S&P 500 Index® has recovered roughly half of the decline it suffered in that 9 session period and is up 1.62% year-to-date.

It’s never been our focus to try to manage investment portfolios by trying to time the ups and downs of the market, and this rapid decline and partial recovery help support our reasons for not doing so. Often times by the time it becomes evident that a market correction, or even a Bear market, is underway, much of the damage may already be done, and moving out of the market may prevent us from participating in the recovery.

Knowing that markets are volatile and unpredictable, and that there will be both Bull and Bear markets, we suggest focusing on building diversified portfolios of high quality, low cost investments that are appropriate given the items regarding one’s personal situation mentioned in the first paragraph.

Most diversification strategies include dedicating some portion of a portfolio to Bonds and/or Bond funds (I’ve touched on this subject a couple of times in previous issues). Bonds rarely, if ever, hold the upside potential of stocks, and their performance can frustrate some investors when the stock market is soaring, but they can nonetheless play a valuable role in a portfolio. In addition to paying dividends on a regular basis (many bond funds pay dividends monthly) that can be reinvested or directed to other areas of the portfolio, Bonds can help mitigate the damage to a portfolio during stock market corrections and Bear markets. Limiting damage during rough periods can help keep an investor’s head in the game, allowing them to stay focused on the big picture and helping ensure that they’ll be there to participate in the eventual recovery.

During the nine session period mentioned above when the S&P 500 Index® fell 10.2%, the Barclays U.S. Aggregate Bond Index®, which is commonly recognized as the go-to index to gauge the performance of U.S. Investment Grade Bonds, fell 1.3%. Somewhat disappointing that it fell at all, but clearly a 1.3% decline is less damaging and potentially easier to recover from than a 10.2% decline.

If you questions about how your current situation might be affected by recent events, please feel free to call Ted Black, CFP© at 888-878-0001, extension 3.

Advisory services offered through Royal Palm Investment Advisors, Inc., a Registered Investment Advisor.