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Rough Seas Ahead, Should you Change Course?



April 27 , 2018 | Posted by James McGrath |

Rough Seas Ahead, Should you Change Course?

As most everyone knows, the past few months have seen volatility return to the investment markets.  2017 was a historic year for the S&P 500 (500 largest US companies) where the index was positive every month of the year with the number of 1% moves experienced (up or down) only being eight. We’ve now had nearly three times as many of those moves so far in 2018!  2017 was exceptionally calm with regard to market volatility and likely lulled some investors into thinking (inaccurately) that market risk doesn’t exist anymore.

The first quarter of 2018 was broadly negative.  However, those losses were modest, despite what the media and market pundits would have you believe (see the chart below).  Keep in mind that over the past five years ending March 31, 2018, the returns of the S&P 500 and the International Developed markets, as measured by the MSCI EAFE, were both up 13.31% and 6.50% per year, respectively.

So, now that volatility is back, what should you do?  Some investors can, understandably, get nervous and want to change course on their long-term financial plan.  While the current markets can create a sense of unease, we believe it’s critically important for investors to have a solid, long-term financial plan with a well thought out and diversified portfolio to help withstand the turbulent markets.  The journey up to and through retirement (and ultimately the transfer of wealth to your heirs) is a long one and requires a seasoned sailor to navigate the choppy seas.

In a recent article written by Jim Parker, of Dimensional Fund Advisors, he notes, “A mistake many inexperienced sailors make is not having a plan at all. They embark without a clear sense of their destination. And once they do decide, they often find themselves lost at sea in the wrong boat with inadequate provisions.”   Mr. Parker goes on to discuss how a good advisor, much like a good navigator, regularly reviews a client’s coordinates to make sure they are still on the right course.  Choppy seas, while not enjoyable to endure, are common on a long sea voyage.  The key is to make sure you understand your long-term objective and are comfortable with the goal in front of you.  There are many distractions in the news that can scare investors.  Many of the well-known pundits, whether on television or in print media, seem to relish in shocking investors into “doing something” when the market swings up or down.  Rather than reacting to those daily headlines, be sure to fully understand your plan and the assumptions used so you don’t veer off course.

Gaining historical perspective is one way to wrap your head around the volatility reported in the news.  The chart below, from J.P. Morgan, shows returns of the S&P 500 going back to 1980.  What is interesting to note is that the solid black bars show the year-end return for the index for each year, while the red dots shows the intra-year declines in each of those years.  As you can see, in every year there was a point in time when the market declined meaningfully.  Over this timeframe, the average intra-year decline was 13.8% but note that in 29 of the 38 years listed, the final year-end returns were positive.

Without question, the recent volatility of the markets has caused unease for many investors – this is just natural.  It’s important to make sure you control what you can control and don’t get distracted or blown off course by some of the short term “noise.”  Market corrections and recessions are normal occurrences over time and we will experience them on an ongoing basis.  A final point by Mr. Parker: “But for all of us, it’s critical that we are prepared for our journeys in the right vessel, keep our destinations in mind, stick with the plans, and have a trusted navigator to chart our courses and keep us on target.”  Cassady Schiller Wealth Management focuses on helping our clients define their goals and develop a holistic plan to achieve them.  If you are unsure about your future, let us help you chart your course!

Past performance is no guarantee of future results.  There is no guarantee an investing strategy will be successful.  Diversification does not eliminate the risk of market loss.  All expressions of opinion are subject to change.  This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services