Remember, we are in this for the long haul!
I have not written to you about market volatility for quite some time. We have enjoyed an unusually long period of relative market calm. The increase in volatility in recent weeks could be, in part, a reflection of the fact that volatility has been low for some time. Volatility shows that investors have renewed uncertainty about the future. Of course, we know that markets do not move in one direction all the time. We also know that periodic declining prices are a normal and necessary part of a properly functioning market system.
In other words, markets are behaving as they should. Prices are moving in response to new information and adjusting to reflect changing risk and return expectations. Declines like we had in August don't happen very often, but they have occurred in the past and will again in the future. Volatility is normal in uncertain times when emotions are running high. This is how investment markets function.
This is the third decline of more than 10% since the market bottomed in March 2009. The S&P 500 declined 16% in 2010 and 19% in 2011. Five more declines occurred after 2011 each ranging from 5% to 9%. All these declines have occurred during an up market and we expect more in the future. In fact, there have been 26 declines of 10% or more in the S&P 500 since 1962.
That is an average of one every two years.
You should expect continued price volatility in coming weeks. This kind of volatility is normal for stocks in uncertain times. In fact, volatility is why we expect stocks to deliver higher returns than other investments over the long haul. This is because studies show that once markets become volatile, the volatility tends to persist. This does not mean that prices are likely to go down. Volatility moves in both directions. After a 12% decline in August, the market has recovered almost half as of the day I’m writing this article. We will continue to monitor the situation and we do not recommend any portfolio changes at this time.
As a final thought, be reminded that as long-term investors we must be careful not to let the events and emotions of the day cause us to become distracted from our long-term goals or our disciplined investment process. Remember, what we believe is almost always influenced by what we know or have experienced, and what we believe almost always influences our “do”. These changes bring great uncertainty, causing fear and concern for many. If we believe something is true, it's almost guaranteed to influence what we do. Sometimes a belief is also driven by fear. Sometimes, that fear is driven by something we believe to be true (whether it's true or false, real or perceived). How we respond to fear can be influenced by how we've experienced life in the past. The key is whether we believe on the basis of truth; or faith in something or someone. Many of us are exposed to incredible amounts of information in the midst of all this change. The media, airways, magazines, smart phones and internet, all allow us immediate access to the last-minute news and updates. The "noise" is almost relentless. If we listen enough, we come to believe that it is also true. This belief can have a profound impact on our lives through the decisions we ultimately make (the “do”). Is what you are choosing to do today, based on truth?
Please call us if you’d like to discuss this further. Thank you for your continued trust and confidence.