Before I get too deep into what I mean by this quarter’s title, I think it important to reiterate our core investment philosophies and beliefs. We focus on building portfolios to be highly diversified for the long run. They are based on each individual’s objectives and risk tolerances. Controlling both risk and cost is absolutely paramount. It may sound simple… but it isn’t always easy to do!
I think it prudent to always be prepared for normal market volatility. It is equally prudent to remember that such volatility is not a major event. We live in an unavoidably noisy and volatile world. Be it investments, politics, community relations, health initiatives, or even sports. You name the subject matter and we will all be familiar with a recent news story relating to it… and it is most likely contentious. What we haven’t seen much of lately is normal stock market volatility. I am not making any predictions, but I think we should prepare for inevitable (and perfectly normal) market movements.
Here are some interesting facts regarding market fluctuations:
- There have been 17 market declines of at least 5% for the S&P 500 since March 2009. That’s an average of three such declines each year. Interestingly, there has not been even one 5%+ decline since June 2016. Since the low in March 2009, the S&P 500 has climbed from below 750 to over 2400.
- We have not had a normal market correction (defined as decline of at least 10%) since August 2015. These corrections generally occur about once a year.
- For the past three decades the average intra-year decline (the movement from high to low during any given year) for the S&P 500 is approximately 14%.
Since fall 2016, we have experienced markets with extremely low volatility. And- for the most part markets have moved in one direction: up! While this feels great and we enjoy looking at our statement values and performance numbers, we must remember this extended period of consistent upward movement is out of the ordinary. If it seems too good to be true, chances are it is. Be prepared.
I recently read some market commentary around characteristics of the makings of a good investment analyst. There were many characteristics mentioned, but one in particular stood out: humility.
At some point, each person- either as an individual investor or as a money manager- will be humbled by the markets. Mistakes will be made, egos will be checked. I’ve seen it happen, and I’ve experienced it myself. The defining difference is, however, how one chooses to react. Do they change their approach or even alter their core investment philosophies? Are they looking for the next “great idea” to outguess the markets? Do they lack conviction and become easily swayed? Philip Tetlock and Dan Gardner sum it up for us in their book Superforecasting: The Art and Science of Prediction: “The humility required for good judgement is not self-doubt - the sense that you are untalented, unintelligent, or unworthy. It is intellectual humility. It is a recognition that is profoundly complex, that seeing things clearly is a constant struggle, when it can be done at all, and that human judgement must therefore be riddled with mistakes.”
Deciphering and navigating the complex world of investments is not easy. Indeed it is quite complex. It is challenging. But it is also so rewarding! Having a positive and meaningful investment experience requires both a sound belief system and investment philosophy which demand patience, discipline and intellect. David Booth, Founder and Executive Chairman of Dimensional Funds says it best: “We know that a big part of enjoying the expected benefit of long-term returns relies on the ability to stay invested.” It may sound simple… but it isn’t always easy to do!
I think we have all experienced times in life when we felt we were in perfect control… and then something changes. Whether it is your own health or that of a loved one, professional ups and downs, or related to finances and investments, not having a core belief system and means for dealing with these events can be overwhelming and problematic. When the markets simply behave like they do, have confidence in knowing that normal is a nice way to go through life!
i. Market Declines of 5% or More: S&P 500 Index March 9, 2009-March 31, 2017. Meeder Investment Management.
ii. Staying the Course. First trust Portfolios.
iii. Oakmark and Oakmark Select Funds, Portfolio Manager Commentary. Semi-Annual Report. March 31, 2017.
iv. Keys to Prevailing Through Stock Market Declines. American Funds. 2015. Letter From the Chairman, 2017. Dimensional Funds. March 31, 2017.
v. Letter From the Chairman, 2017. Dimensional Funds. March 31, 2017.