Given all the excitement since the beginning of the year, we thought it might be helpful to share some of the questions we’ve received and provide some answers to help investors make sense of things and adopt the correct perspective for the current environment.
Answer: Global investment markets have been fairly volatile since the beginning of 2016, largely due to negative sentiments on three fronts: Oil’s continued decline, China’s dimming growth prospects, and a softening global economic outlook. Naturally, this volatility has investors guessing where and when things will settle out. It’s worth noting we’ve gone 7 years without a normal market contraction, so we are a bit overdue. Nonetheless, it surprised many investors who had gotten comfortable with status quo since 2008.
Answer: It’s natural to be concerned when uncertainty rears its ugly head. But, there’s a big difference between feeling concerned, and acting on your concern. We know that, when it comes to finances, people are emotional animals. When it comes to your finances, emotional decisions based on fear or uncertainty are rarely productive or rewarding. Instead, set aside your emotions for a moment and let’s look at things logically:
True fact: Market advances and declines are normal and natural.
True fact: No one can predict when or how much markets will advance or decline. And no one can tell when advances or declines will start or end.
True fact: Every single past decline has been followed by advances to new market highs. But the timing of the advances is unknown. Some are faster than others.
True fact: Portfolios that are well diversified and remain invested through market declines have recovered when the inevitable advance occurs.
Answer: Remember there is a big difference between loss and fluctuation. Loss is permanent and only occurs when you sell. Fluctuation is temporary. Let’s look at an example:
Investor A buys a long term investment for $100. The next day, the value of that investment declines to $90. Investor A sells. He incurs a loss of $10. Investor B buys the same long term investment for $100. She notices it declines to $90, but does nothing. What will it be worth tomorrow? Maybe more, maybe less. But Investor B has lost nothing because she didn’t sell anything. Let’s assume the next day the investment is worth $100 again. How does Investor A feel? How does Investor B feel?
The value of your portfolio changes all the time. So does the price of everything else- groceries, gas, plane tickets, etc.
Answer: If it were that easy, we’d be doing it all the time. Fact is – trying to time when to get in and out of markets is a loser’s game. Study upon study proves it cannot be done with any consistency. Let’s be realistic – if anyone could predict and time the markets accurately and consistently, would they be doing it for you? Nope. They’d likely be living on an island somewhere. Their own island.
It’s not timing the market – it’s time in the market – that matters. (Re-read the True Facts from Question #1.)
Answer: There are two things that affect your investment success over time: Returns and risk. You can only control one of them – risk. Specifically, you can control how much expected fluctuation you may experience and how much you can comfortably stand – knowing that it’s temporary. Focus on what you can control – not what you can’t. Markets such as this give investors an opportunity to assess their risk tolerance and make sure it’s aligned with their portfolio. If you have any questions, call us.
Finally, we’d like to once again offer investors our Ten Rules for Surviving the Next Downturn. This is a timeless piece we developed over the past thirty years of working with clients and is designed to help investors maintain their resolve in challenging times.
“FCWA’s Ten Rules for Surviving the Next Market Downturn”
Tomorrow may be the beginning of a new and historic market advance upward. Or not. In March of 2009, there weren’t a lot of experts predicting the beginning of a 6 year long market advance to new highs. Those who panicked out and sat on the sidelines watched the train leave the station without them. No one knows when the inevitable reversal will begin, which is why investors must stay in for the long haul.
Managing our emotions is at least as important as managing our investments. Things will improve as they always have. Faith in the future, patience, and diversification are the strongest weapons we have to combat uncertainty and fear.
This is perhaps the single most important of the Ten Rules. The historical record is clear. 100% of all past market declines ended with advancement to new market highs. We just don’t know when it will begin and how long it will take.
This one is pretty self-explanatory. You can’t just have the advances.
Our January Commentary highlighted the dismal track record of the “experts” in predicting the short term future. You can see it on our website by clicking here: http://firstcoastadvisors.com/financial-navigator-for-january-2016/
The financial media are not in the truth business. It’s their job to attract eyeballs and advertisers. And bad news sells better than good news. When was the last time you watched an hour of news and felt better about things? Never. The news outlets sell fear. Don’t buy any.
We can all recall how we felt during the Recession of 2008. Maybe even the Tech Bubble of 2000-2002. But time has a way of softening the edges of our discomfort. This time will be no different.
One of the pillars of capitalism. Would you rather buy tuna fish at $5.00 per can, or two cans for $4.00 when it’s on sale? Market declines create values. Values create long term wealth.
Fluctuation is temporary. Loss is permanent. Remember Investor A and B above.
Advances have always followed the declines. There is no speculation here – only facts and history. Investors over ten, twenty, thirty years have been well rewarded by embracing these ten rules.
We hope this special commentary helps ease the inevitable discomfort that sometimes accompanies market volatility. If you’d like to discuss the current conditions or your current investment portfolio, call us. We’re here to help.
The First Coast Wealth Advisors Team