The markets are currently undergoing another bout of volatility. This current dip was initially sparked by concerns about rising interest rates, but now we have heightening tensions with China, an international development brewing surrounding the mysterious death of a Saudi journalist adding to the mix and of course mid-term elections.
Market dips always have scapegoats. As you think back on history, it is very hard to remember what those scapegoats were during previous bouts of volatility. In other words, they matter a lot at the time but rarely hold lasting significance.
That being said, there are potential structural changes to the global economy with respect to interest rates and trade relations among major nations. So while I believe the Federal Reserve will take a rational path rather than move too far too fast, and I also believe that the US and China will find some way to each claim victory in a negotiation, these are truly important matters that I will be watching closely.
Specific scapegoats aside, this dip, while uncomfortable, is very likely a good thing. I never want to underestimate the emotional impact of wild volatility, but I also never want to overestimate its impact on successfully investing for goals that lie ahead.
The truth is that volatility and market dips are extremely important to the bigger picture and we would be in greater danger if they didn’t surface from time to time.
I have said many times in many forums that I would like for 2018 to be a year of consolidation and not a repeat of 2017‘s upward surge. It was my thinking that a pause was necessary and it was my hope that we would get one. At this point, this is essentially what 2018 is providing. I was hoping for this pause so that we would have a lower likelihood of any sort of a boom/bust event. With the global economy still expanding and corporate earnings still rising, a pause in upward prices means markets get less expensive and move farther away from bubble territory by simply marking time. We’ve had years like these in the past – 2011 and 2015 most recently – and they served the wonderful purpose of wringing out excesses and building bases for future growth. If you remember, there was no shortage of panic-laden news in those years. Pauses in the markets aren’t necessarily peaceful. But they certainly are purposeful.
I believe the current episode is quite similar to these recent examples. This means long-term investors are likely to get their wish of healthier markets with better valuations to support long-term growth. This is in contrast to spikes higher that lead to truly painful drops.
Source: Futures Magazine Circa 1987-8
If you are not burdened by high personal debt levels and are truly investing capital with a longer-term purpose, this current dip is not your enemy. But for those who are investing borrowed money or have confused short term savings with long-term investment capital, times like these are particularly scary and should have you considering some allocation changes.
Assuming you are in the first category above, what exactly should be done within a portfolio at times like these? First and foremost is to always be sure you are diversified among many asset classes and not purely beholden to the stock market or bond market alone. Next is to be sure to adhere to discipline when it comes to limiting risk. For most of us, well-defined stop losses are a cornerstone of this discipline. Others prefer different hedging strategies. The main point is to not ignore these disciplines, no matter which you’ve chosen. There is an old adage that says to never let conviction trump discipline. This means you should still stick with your discipline of diversification and exit strategies whether you happen to be convinced of either your bullish or bearish standing. And, of course, be honest with yourself about your ability to rationally sit through normal market dips.
If times like these have you sitting on pins and needles or you’re losing any sleep, let’s have a conversation about the best ways to position your portfolio to meet both your financial and emotional goals. After all, money you’ve earned and saved is meant to add to your peace of mind, not detract from it.
It is critically important to recognize that history suggests we have these kinds of events an average of 2 to 3 times every single year. That means that 20 or 30 times every decade the markets toss around like bottles on the ocean and news outlets predict calamity to boost ratings. And yet every time it feels unique and every time it feels like it might have the potential to be something radically worse than a healthy pause. The odds are that it is not. And if your disciplines are in place, than even if it is, you should be limiting downside risk and preserving capital to assure your long-term goals are still achieved after the storm has passed.
Those of us in Florida know how quickly violent afternoon thunderstorms come and go. They are very loud and potentially dangerous. But they also leave just about as quickly as they arrive; and once they’re gone, you tend to have remarkably beautiful evenings. It’s very unlikely that they create tornadoes or do the kind of damage that needs significant repair. The current storm blowing through the market seems to fit this mold. I don’t know if the heaviest rains have come down yet or not, nobody does. But it still looks to me that when the storm passes, we will have much bluer skies ahead and I would suspect markets to do fairly well for a number of years.
This is exactly why I wanted this pause, noisy as it may be. I would much rather have a healthy base for multiple years of future growth over an overheated market that is likely to hit a hard wall at high speeds any time.
- Don’t let market volatility convince you of a new downward trend too soon. Peter Lynch was famous for saying that more money has been lost anticipating corrections than what was ever lost in the corrections themselves. This is likely a healthy correction that is serving a valuable purpose for the long term.
- If you find yourself worrying to and unhealthy degree, let’s please talk. I would be delighted to have an honest conversation about changes that may, or may not, need to be made to your current approach to assure your hard earned assets are providing peace and not stress.
- Our tagline here at Winn Partners Financial Group is “Stability in Motion“. Among other things, this means that we aim to recognize and embrace the natural motion of financial markets, but also to provide stability to our clients in every way.
Please let us know however we might be able to help make this a reality for you.