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Market Volatility Increases

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It happens like clockwork. We get a week of poor stock market performance and the weekend financial press overflows with stories about the next bear market being upon us. Those articles show up because they attract eyeballs and the corresponding advertising revenues. They almost never have serious and well-reasoned insights.

We sometimes wonder how much money any of these people writing about the market actually have in the market. They may have a few funds in a 401(k) but how much skin could they possibly have in the game? Have they ever had to be held accountable for the results of the ideas they put forth in their articles? Do they ever have to face the music of the outcomes of their fear and greed peddling?

If you’ve taken any time in the past several months to read these Worth Considering issues, you are well aware of that fact that we’ve been expecting some kind of a pullback in the market. You also know we haven’t been making a specific prediction about its timing. Instead, we simply understand that investing is ALWAYS a matter of ups and downs. Most global stock markets have been in a pretty nice upswing over the past few years but it’s hard for us to imagine how anyone could not have expected some kind of pullback at some point.

Well, here it is.

Do we do anything different about it? Probably not. At present, we see no reason to change anything since our strategy assumes we’ll see regular market volatility over time. The thing we do keep a watchful eye on in ourselves and for our clients is the manner in which our emotions can affect our investment decisions.

Nobel Prize winner Daniel Kahneman showed how portfolio losses are 2-5 times more psychologically painful than the pleasure of portfolio gains. This concept is known as Prospect Theory and it shows that we behave irrationally when it comes to the difference between gains and losses.

We’re internally wired with a flight or fight response and we need to be vigilant about keeping it from overruling our logic circuits. This is usually a lesson we all need to learn the hard way but hopefully the lesson sticks and we are able to establish an investment strategy to deal with our innate emotional shortcomings.

By now, you probably know what we’re going to say. Our strategy is pretty simple:

This is not rocket science but, like a good diet, it can be difficult to adhere to on a regular basis.

Real investors hope for down markets. They understand that if they only root for higher and higher markets, they are rooting for lower and lower future upside potential. They understand that value comes when all the $200 Scottrade account holders are dumping their shares and buying into the next fad.

We’ve found First Trust Chief Economist Brian Wesbury to be a very pragmatic voice over the years and thought we’d share some of his thoughts. Brian is the first person we heard put forth the notion of the “Plow Horse” economy that we’ve adopted. The following link will connect you to a video he recorded last week and has a lot of great information:

http://www.ftportfolios.com/Commentary/EconomicResearch/2014/8/1/dont-fret-the-dip-fundamentals-are-ok

Brian has an ability to see through the haze of market data and find those points that cut to the heart of the matter. It will be well worth your time to watch the video. We don’t always agree with him but it’s quintessential for any serious investor to pay attention to those people they don’t always agree with.

We are raising a little cash these days in case we can find good entry points for certain investments. Mostly, it’s a matter of cleaning up a few things that have been on our radar anyhow.

If you’re looking for a reason to be worried, there are plenty of things to choose from these days. Of course, there are always lots of bad things to choose from. We may be in for a big correction or this may be a small blip on a much higher trend line. We have no idea and anyone who says they do is lying or an idiot.

Corrections happen constantly in financial markets and it’s our job as your advisors to help you through them. You are always welcome to contact Tara or Shelby to set up a time to speak with us.

Jeff and Ken, Orlando Financial Advisors

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Member FINRA/SIPC. The information provided is based on carefully selected sources, believed to be reliable, but whose accuracy or completeness cannot be guaranteed. Any opinion herein reflects our judgment at this date and is subject to change without notice. This should not be construed as an offer or solicitation to buy or sell securities. Investors should consider the investment objective, risks, and charges and expenses before investing in an investment company product. Stocks, options, and mutual funds are subject to market volatility and the chance that they may lose value. Bonds are subject to changes in interest rates, risks of defaults by issuer, and the loss of purchasing power due to inflation, or the risk that an issuer will be unable to make interest or principal payments. Additionally, bonds and short-term investments entail greater inflation risk than stocks. Any fixed-income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.

Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be either suitable or profitable for a client or prospective client’s wealth management investment portfolio.

This information is not intended to be legal or tax advice. Please consult a tax, legal, or financial professional with questions.

Investing in securities underlying in currencies other than the U.S. dollar involves certain considerations comprising both risk and opportunity not typically associated with investing in U.S. securities. The security may be affected either favorably or unfavorably by fluctuation in the relative rates of exchange between currencies, by exchange control regulations, or by indigenous economic and political developments. As with any investment, there is no guarantee against potential loss. Investments in securities and insurance products are:

NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE

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