The first two months of 2016 have looked a lot like the last few months of 2015, with markets fluctuating around the globe. While the markets movements may be unsettling to some, the vast majority of analysts do not see it as the beginning of a recession, but as a normal market correction. (It’s been so long since we’ve had one, most people probably don’t remember what a normal correction looks like. Well, this is what it looks like.) The major contributors to the markets fluctuations haven’t changed since our year end commentary – it’s the slowdown in China’s expansion, uncertainty about interest rates, and global softness in economic growth.
In terms of forward looking expectations, the general consensus among analysts is as follows:
In sum, investors need to remain properly diversified and resist the temptation to read too much into the daily grind of the financial media. Most investor portfolios are down modestly compared to the broader markets – one of the many virtues of diversification.
You’ll notice we use the word “fluctuation” while the financial press uses the word “volatility”. Why? Because “volatility” carries a negative connotation, whereas “fluctuation” does not. Case in point: The first two weeks of the year saw markets fluctuate downward. But in the six trading days between February 10th and February 22nd, the Dow Jones Average fluctuated upward to the tune of about 920 points.* Our point here is simple – markets move in both directions during periods of higher activity. Sooner or later, the fluctuation will settle out, and attention will turn back to fundamentals, which is where it should remain all the time anyway.
We understand why people like to use the S&P 500 and the Dow Jones Average to compare to their own investment results. They are readily accessible, and you hear about them 30 times a day. But there are two important and critical flaws in this thinking:
First, if you’re properly diversified, you probably own the S&P 500 as part of your portfolio – perhaps 10% -15%. But a globally diversified investor also owns bonds, real estate, international stocks, and small stocks as well. If your portfolio is comprised of 11,000 different securities in 40 countries around the globe, then comparing your results to the 500 largest US stocks is comparing apples and oranges.
Second, returns are only one half of the equation. The other half? It’s risk. True, if you only owned the S&P 500 alone for the past few years, you’ve earned more than a globally diversified portfolio did. But, at what cost? That is – what was the potential downside risk in your portfolio? Well, it’s the downside risk of having 100% of your money invested in large US stocks. Anybody remember 2008? While large US stocks cratered, high quality bonds were actually positive that year. Point is – you can’t have it both ways. If you want the pure returns of stocks, you have to be ready for the ride. And most people aren’t. We invite you to compare the fluctuations of the S&P 500 against the fluctuations of a diversified portfolio this year so far. You’ll see what we mean.
Stay tuned for our quarterly commentary next month, when we’ll take a closer look at year to date results and the political outlook for the rest of the year. See you then.
Your First Coast Wealth Advisors Team
*Source: Yahoo Finance
Asset Allocation and diversification do not ensure a profit or protect against loss in a declining market.
The S & P 500 & DJIA are unmanaged indexes and cannot be invested into directly. Past performance is not a guarantee of future results.