The last several trading days have reminded us that equity markets do in fact have volatility. This volatility in the near-term can be very unsettling for us as investors. Warren Buffet made a famous statement concerning the markets, “In the short run, the market is a voting machine, but in the long run, it is a weighting machine.” Meaning, in the short-term markets are driven by emotions of fear and greed, but in the long-term fundamentals matter.
With this stated, we are reminding our clients of the following:
Keep your view long in its focus.
In the near-term no one can accurately predict market movements. Even if a prognosticator was fortunate enough to call the market peak, is he/she going to be able to accurately predict when it is appropriate to buy the same market back? The odds of this action are extremely low. We would argue that we have as good a chance of winning in Las Vegas as anyone has in predicting short-term market movements accurately over time. Short-term focus is gambling, not investing. We refuse to gamble with our clients’ future.
If long term goals haven’t changed, why should portfolios?
We have structured our investment portfolio in a manner that we believe gives us a high probability of hitting clients’ long-term goals and dreams. If we change the portfolio substantially in the short-term, it is our opinion that we introduce a risk that we may not achieve these long-term goals. If we feel confident we will reach our clients’ goals over the long-term, why introduce risk in the short-term? Stay the course and don’t lose sight of the long-term goals.
Capitalism is cyclical by nature.
We know from our experience as investors that nothing goes up in a straight line. The markets, the economy, and businesses all have periods of growth and periods of contraction. We focus on how we feel the global economy will do over the next 10 years, not over the next 2 quarters. We tell our clients if their time horizon is longer than 3 years, don’t worry about the short-term noise. Expect that at some point we will have a market correction and expect that we will again have a period of negative market performance. Both are normal in markets driven by capitalism. We have sought to design our portfolio to weather volatile periods in the market and to achieve a specific long-term return objective.
Keep short-term point moves in perspective.
Media coverage focuses on the point move which may distort the real magnitude of a market movement. Focus on the percentage movement. The 1,175 point move in the Dow Industrial Average on Monday, 2/5/18 is a substantial move in the market. While it is the largest point movement in a single day, there have been several larger percentage point declines in modern market history. In 1987 the Dow dropped 508 points in a day. Less than half the point movement of Monday 2/15/18. Due to the then level of the Dow Jones, that represented a 22.6% drop in a single day. More than 5x the 4% move on Monday 2/5/2018. We tell our clients not to get caught up in the media frenzy and mentally recalibrate what constitutes a “major market swing.”
We expect volatility to pick up in the coming months.
The recent market has been uncharacteristically lacking volatility. The last 24 months have been one of the least volatile periods for stock movements in modern history. According to the St. Louis Fed, volatility has averaged 13.45% a significant discount to the historical average of 19.35% (from 1990 – Present). Again, we have sought to design our portfolio with downside protection in mind, but more importantly we want to focus on the long-term success of our plan. Short-term volatility is normal, expected, and we have sought to account for it in our planning.
Stop worrying and go enjoy life!
We stress to our clients that money and wealth are tools to be used to reach a greater goal. We have spent many hours working together to construct the plans needed to use this “tool” to reach those goals. We tell our clients to remain confident in those plans, as their most important goals are driving our decisions. If something substantive changes in the global economy, we will determine whether to adjust our strategies. We are here to have our clients’ sleepless nights for them.
This material is provided by Gryphon Financial Partners, LLC (“Gryphon”) for informational purposes only. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Facts presented have been obtained from sources believed to be reliable. Gryphon, however, cannot guarantee the accuracy or completeness of such information. Gryphon does not provide tax, accounting or legal advice, and nothing contained in these materials should be taken as tax, accounting or legal advice. Individuals should seek such advice based on their own particular circumstances from a qualified tax, accounting or legal advisor.