It's All About Perspective
BREAKING NEWS: CNN, Fox Business, and CNBC, are all reporting a greater than 1,100-point drop in the Dow Jones Industrial Average! “The largest single day point drop in US market history!” All major US Indexes down 4% during global sell off!
Do we have your attention now?
There are only a few ways that the media effectively grabs our attention. When it comes to markets, mostly they are negative; declaring impending doom, instilling fear and uncertainty. The issue with this method is that it’s so myopically focused, they are essentially saying, “Don’t look at the bigger picture! This small part is what is important!” This is where Your Financial Coach™ and perspective comes together.
Let’s look back at the US markets recent history and milestones below:
The Dow Jones Industrial Average, S&P 500, and Nasdaq are the media’s favorite and America’s most popular indexes to track. While it is not possible to invest directly in an index fund, looking at the data you can see why it is irrational for the media to push uncertainty and fear into our lives, even if there was a “single day record point drop”. You can see that market’s returns speak for themselves when you observe longer time periods than only a single day, week, or month (the media’s preferred time horizon). Taking the longer view is much more important than worrying about where the market is going in the short term. The reason is simple: no one knows which way the market will go from one day to the next. However, history and empirical data shows us that the long-term trend is up.
The returns above also reinforce why it is so important to remain disciplined with your investment philosophy. Our strict adherence to Modern Portfolio Theory provides the academic foundation and historical guidance to be ready for events such as a single day 1,100-point drop. Dependent upon your investment objective, activity, and recent growth, your portfolio is automatically rebalanced quarterly regardless of your current asset mix. Example: A Balanced model 60% Equity 40% Fixed Income portfolio has become 70%/30% because of strong US and international equity growth. Rebalancing would sell off the excess equity gains and buy high quality short term fixed income. Since this happens quarterly, the most recent rebalancing would have occurred mid-January. The other added benefit of periodic rebalancing is that it forces you to follow the first rule of investing: buy low, sell high.
Finally, it's important to understand volatile events like an 1,100-point drop. Since November 2016, the US market has steadily increased with very few greater than +/- 1% moves day to day. So yes, -4% in one day is a shock to an otherwise low volatility environment. Nevertheless, this is a good sign. As investors, we tend to say we don’t like volatility. However, that is not exactly an honest statement. In general, we investors don’t like downside volatility, but we all love upside volatility. The conflict is that you can’t have one without the other, and, you need downside and upside volatility to create opportunities to buy low and sell high.
Times like these give us a gut check as investors. If you are recently new to investing and this one-day volatility is too much for you, it may be a good idea to rethink your risk tolerance. If you are feeling uncertain about your risk or looking for additional education about markets and investing, please don’t hesitate to call Your Financial Coach™ and schedule a coaching review.
1. Morningstar Advanced Analytics Software.
3. Morningstar Advanced Analytics Software. Date Range 3/09/2009 (market low) to 2/06/2018