In December, both US and international stocks have experienced a significant sell off. The S&P 500 has now declined approximately 20% (peak to trough) from all-time highs set in September.
Many investors are left wondering what to do now. It’s perfectly normal to have questions and concerns when markets have severe downturns. When making decisions after market sell-offs, it’s important to control emotions and avoid panic movements you may regret later. In that regard, here are suggestions we have regarding the current situation and what investors can think about:
- Understand that this happens in the stock markets. According to Sam Stovall, Chief Investment Strategist for CFRA, the S&P 500 has had 22 corrections (defined as 10% down from recent highs) and 12 bear markets (defined as 20% down from recent highs) since 1945. While never enjoyable, these events are relatively common in the markets. Over longer periods, however, stocks remain the best source of growth for portfolios.
- Understand the purpose of the different assets in your household portfolio. At Gradient, we strive to diversify client portfolios in accordance with their individual risk and return objectives. What this means is that we utilize assets that are relatively safe (bonds, cash, annuities) in conjunction with more growth-oriented assets (stocks) to provide a diversified financial plan that meets your risk and return objectives. When stocks are increasing rapidly, investors tend to wonder why they own assets that aren’t growing as fast. When stocks are falling rapidly, investors tend to wonder why they have stocks in the market at all. By understanding the purpose of the investments in your portfolio, it provides greater clarity on your financial plan on how those assets work together to meet your objectives.
- Rebalance and make moves at the margin. If you feel the need to “do something” as a result of changes in the market, it is always better to make moves at the margin rather than making “all-in” or “all-out” transactions. Timing the market is incredibly difficult to do and is typically a detractor of value over time. However, an action that can add value is periodic rebalancing. As markets rise and fall, current allocation weightings can change from their original long-term allocations. Periodic rebalancing allows investors to sell stocks after a sharp rise or buy stocks after a significant decline. This realigns portfolios back to their appropriate percentage allocations in accordance with your financial plan.
- At Gradient Investments we understand that during sell-offs investors often tend to throw out the baby (good companies) with the bath water. We use this situation opportunistically to realign our portfolios internally. During the decline we have been scouring each portfolio’s investable universe for opportunities as valuations get cheaper for companies that are high quality and have sustainable long-term growth profiles. We transition stocks within portfolios to take advantage of those opportunities. We also aim to rebalance not only our allocation portfolios, but also the stock portfolios as prices bottom out.
In our opinion, investors fare better having a long-term financial plan that incorporates several asset classes to meet their objectives. Diversification works over time, but doesn’t work all the time. Understanding how assets work together in your overall financial plan can shield investors from making decisions based on emotion. This gives them a better chance of achieving their long-term objectives.
To reiterate our stance from early December, we believe:
- 2019 is a slowing growth, but not recessionary, economy.
- Consumers remain relatively healthy and are spending
- Corporate earnings growth will slow from 2018, but should still have mid-single digit growth in 2019
- Valuations are more attractive now than they were 3 months ago
In summary, market declines are normal but still difficult to deal with. A diversified financial plan (including both safe and growth assets) can provide less volatility over time while still helping achieve long-term goals. Before making portfolio decisions please talk to your advisor to get an objective opinion on the situation. Finally, keep in mind that our economic forecast is still constructive, and after the recent pullback we feel the prospects for positive market returns in 2019 are strong.
To expand on these Market Reflections or to discuss any of our investment portfolios, please do not hesitate to reach out to us at 775-674-2222.