Published in the Sept. 2-15, 2015 issue of Morgan Hill Life
Glen Webb
Stock markets around the globe experienced a substantial decline in value the past few weeks. In the U.S., the recent decline in the Dow Jones Industrial Average officially qualified as a correction (i.e., when an investment declines 10 percent or more off of a recent high) and many other indexes aren’t too far off similar sized declines.
We know market volatility can be unnerving and sometimes scary. Keeping perspective on how markets operate may not be the most comforting advice, but it is often sound advice. Volatility is part of investing. We talk with investors on a regular basis about how markets rarely move in a straight line, but they have historically gone up more often than they have gone down.
Additionally, we talk to investors about how risk and return are related. If we want greater returns in the longterm, we have to tolerate some volatility. The volatility we’re seeing now is fairly normal by historical standards. It may seem hard to believe, but when we look back to 1900 on the Dow Jones Industrial Average, there has been a 10 percent decline on average about once a year (source: American Funds). If there has been one abnormal fact about the market recently, it is that there hasn’t been a decline of 10 percent or more since Oct. 2011.
The cause of volatility is always different. Over the summer we were concerned about Greece. Last year we heard about the strengthening dollar hurting U.S. corporations and before that we were confronted by Ebola and the conflict in Ukraine. The cause of this bout of market volatility stems from investors’ concern over global growth, the return of deflationary pressures and the possibility of the U.S. Federal Reserve increasing short-term interest rates as early as September.
Last time we checked, the economy is doing fine. It continues to grow the unemployment rate continues to decline and manufacturing and service sectors are expanding. Additionally, most corporations are healthy and managing the economy fairly well. I’ll end this with two quotes. The first is a favorite from a talking head who asked a valid question: “Do you think Warren Buffet is selling stocks right now?” That brings it home for me. The daily news cycle gets us focused on trading. However, we are not traders trying to ride every wave. We invest to help realize our long-term goals.
The second quote came from behavioral economist and University of Chicago professor Richard Thaler where he posted the following to his Twitter account: “Inhale, exhale. Repeat. Then watch ESPN.” In addition, he posted a graph showing the growth of the S&P 500 Index in the past 10 years and how this recent decline only represented a small dip in its upward trend. Keeping the longterm perspective has served investors well.
DAN NEWQUIST, CFP®, AIF®, Principal & Senior Wealth Advisor with RNP Advisory Services, Inc., a registered investment advisor. Reach him at (408) 779-0699 or [email protected]. Securities offered through Foothill Securities, Inc., member FINRA/SIPC, an unaffiliated company.
