Market Volatility Gut Check
Since March of 2009 the US stock market has risen over 168%. For many of us when we received our 3rd quarter statements we noticed a 5-7% decrease for the quarter. A reminder that investing in the stock market does come with significant downside risk. While most of those losses were erased in the first few weeks in October, we should view times like these as a market volatility gut check. How did you feel and react when you received your third quarter statement? Are you prepared for the market to go down? Has anything changed in our lives that we should discuss to ensure our level of risk is appropriate? Market Volatility is a hot topic in the media, so it is not hard for us to find some relevant articles that support how important it is that we prepare for risks in the market and ensure that our plan is in line with our long term goals. Two of my favorite articles are A Wake-Up Call Without the Trauma posted by Carl Richards in the NY Times and If You Don’t Like the Market Today, Just Wait Until Tomorrow by Tim Mauer in Forbes.
In both of those articles, the discussion is really centered around the history of market volatility and how a long term plan should take into account your personal willingness to endure disappointing months, quarters or years or poor performance in order to earn the higher returns. Willingness to take on market risk is one of three crucial factors that go into determining the appropriate level of market risk one should take. Your need to take on risk, or how far away you are from your financial goals, and your ability to take on risk, or your time horizon, are the other two important factors to consider.
Taking on too much risk in your portfolio, or simply not being aware of the potential downside of your portfolio can often cause investors to make knee-jerk reactions in times of poor performance. For example, looking at the historical performance of the Dow Jones Industrials index below, had investors jumped ship in 2008 when the market returns were down 30% or more, they would have locked in their losses and missed out on six years of positive returns that followed (2009 - 2014).
Below is another view of these though times in the markets, show this same scenario occurring multiple times. A very poor year in the markets followed by multiple years of positive returns.
At Siena, we stress that there will be times where the market goes down and at times dramatically. We also believe that if you have a good solid long term plan and a diversified portfolio wrapped around that plan, then the best course of action in times of market volatility is to stay the course of that plan.