Risk Always Happens Fast

(Updated Charts included) Since the Market highs on 1/26/18, the markets have finally had some overdue volatility.  The S&P 500 has pulled back almost -8% from the most recent all-time high of 2,865.8.  As a reminder, volatility is normal when investing in stocks.  This is why over longer periods of time, stocks typically return more than bonds or cash.

Risk always happens fast!   This is why we focus on asset allocation with stocks, bonds and alternatives.  Investing can be scary.  Bear markets can be terrifying.  It is important to understand the history of investing and control the factors that matter most.  Your net returns will be primarily driven by the following:  1) Investor behavior – have a plan and don’t panic.  Focus on your spending and savings rate/ household profit margin 2)  Asset allocation – have a mix of stocks, bonds and alternatives. 3) Fees and transaction costs – the lower the better.  4) Most investors need a coach.  A high quality Advisor can add value net of their fees.  If you hire an Advisor, make sure they are a Fiduciary for YOU!

Below is some data and charts to consider.

• Monday, the Dow was down -4.6%, this was the 112th largest drop since 1896.
• Expect Asia and Europe to be down in response to the volatile US markets.
• A -10% pullback on the SP500 would be 2,579.  A pullback to the 200 day moving average would be 2,531 (down almost 12%).  A full -20% pullback would be 2,292 on the SP500.   Over the short-term, markets are highly emotional.  When 10,000+ people panic, selling seems to snowball and the cycle of selling continues until exhausted.
• When you invest in stocks, you should not need the money for 7 to 10+ years.  Is there any reason that you think that stocks will be lower 10 years from now?  What is that thesis?  It is important to have a plan and not make behavioral mistakes.
• Because we are at relatively high valuations for stocks and bonds, there is a good chance that we may have lower than average returns over the next 7 to 10 years.  It is important to have a plan, focus on asset allocation, manage risk, reduce expenses and make sure you are saving enough to support your lifestyle in retirement.  If you need help, let us know.
• This pullback of -9.7% in the SP500 was the 22nd pullback greater then 5% since 2009.  If you panic and sell, you may miss additional long-term returns.

• 2017 was the 2^nd least volatile year in the last 90 years (max drawdown of -2.8%), we should expect normal volatility in future years.  Out of the last 36 years, 19 (52.7%) of them have had intra-year drawdowns within the year of at least -10%.  6 out of 36 (16.6%) years have had intra-year drawdowns of at least -20% (see chart below).

• Yet, over 36 year this period, the SP500 is up 55x and a 60/40 portfolio is up 30x.  Only 5 out of the 36 years actually lost money for the year (13.8% of the time).  Markets are typically higher over 10 year rolling periods.

• It is important to think about RISK as a probability of returns.  See chart below

• •  Your odds of having a positive return increase dramatically the longer you hold stocks.  Markets have rewarded discipline over the long-term.

  

• It is almost impossible to “time the market”.  If you invested $10k in the SP500 on 1/1/1997, at the end of 2016, you would have $43.9k.  This is over 5,000 trading days.  If you missed the best 10 days, you would only have $21.9k!  If you missed the best 20 days, you would only have $13.6k and if you missed the best 30 days, you lost money!  Have a plan and stay invested.

Thanks for reading.

Please Remember: Past performance may not be indicative of future results.  Moreover, no current or prospective investor should assume that future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in any general informational materials or educational sessions, will be profitable or equal any corresponding indicated historical performance level(s).  Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for an investor’s retirement portfolio.  Moreover, you should not assume that any discussion or information contained in this website serves as the receipt of, or as a substitute for, personalized investment advice from Integrity Investment Advisors, LLC. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.