A Note on Recent Market Volatility

I am sure that a lot of you have been inundated by news headlines and media reports related to recent volatility in the stock market.  Rather than selecting from a variety of third-party discussion pieces on this matter, I wanted to give you my opinion while reiterating the investment philosophy of my company.

There are a very large number of factors that impact stock market movements from day to day.  While it is impossible to go through each one (and it would provide an incredibly boring read), I think there are two big picture themes that have recently been in play:

1. Both short and long-term interest rates have meaningfully increased over the past few months.  Higher interest rates are competition for assets such as stocks.    When short and long-term   interest rates were close to zero, investors were allocating a lot of their money to risky assets like stocks because there was no money to be made in “safe” alternatives such as CDs and short-term government bonds.  Now that the interest rates paid by these less risky alternatives is higher, riskier assets are being re-priced lower to reflect that more stable alternatives are more competitive.

2. We have gone a very long time since the last 10%+ market decline and were way overdue.  Such an extended period of tranquility is historically rare.  Periodic market corrections, on the other hand, are a part of life.   Corrections are necessary (albeit admittedly unnerving) because they punish excessive risk taking and they remind investors that investing carries risk.  Without such corrections, there would be excessive speculation and the creation of asset bubbles.  This would lead to much bigger market drops and potentially severe economic problems down the road.

Philosophically, I believe that markets cannot be timed and that maintaining a consistent allocation and a consistent level of portfolio risk will be the best strategy.  This automatically leads to trimming risk when markets are performing well and to adding risk when markets are performing poorly.  It is an extension of the buy low/sell high philosophy.  For retirees, it means holding enough cash and conservative short-term investments so that you can have your income now and your portfolio is conservative enough to weather any storm.

Your portfolio is unique to you.  It is designed to match your risk tolerance, your investment time horizon, your liquidity needs and your financial planning goals.  I put a lot of thought into your portfolio’s construction and into how it fits within your overall financial plan.  When your risk tolerance and your portfolio risk are properly aligned, you will be able to stay invested and ride through even the worst market declines.

Despite the steady lineup of pundits who claim they can call near-term market movements, nobody can really do so consistently.  This market correction could have further to go or we could see a rebound to new highs.  With the right investment strategy and the right financial plan, the short-term direction of the market will not matter.

Rebekah and I promise to remain highly engaged and highly responsive to you, especially when times are more difficult.  Regular and open communication is the hallmark of any successful relationship and we promise to work very hard at keeping it the cornerstone of ours.

 

Gary

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