Keeping Perspective When The World Gets Loud

We speak often about avoiding the noise, focusing on the long-term and the dangers of mixing emotions with investment decisions. During low volatility "easy" periods for the market, it can be tempting to dismiss those reminders. However, it is when world events intensify and financial markets correct that investors are most at risk of making costly mistakes.

This is an important time to step back and regain some perspective on how markets actually behave. The first chart dates back to 1970 and shows a long list of crises, conflicts and scary headlines. At the time, most of these events felt like they could derail markets for good — and they influenced plenty of investors to sell. The dark shaded area is the S&P 500, demonstrating the remarkable long-term growth that occurred despite all of those events.

No one, including us, knows whether stocks will have bottomed by the time you read this or not for months. What we do know is shown in the next chart. It displays each calendar year return in the dark columns dating back to 1986. The first thing worth noting is how many more years produced positive returns than negative ones. But equally important, notice that every single year experienced some type of correction along the way. It is not at all uncommon to see an 8–15% decline in any given year. Yet in most of those years, the market still finished positive.

It is hard to know when events in the Middle East and their impact on oil and financial markets will subside. However, we do know from our more than a quarter century in this industry that when investors sell during a time of panic, they almost never get back in until well after the market has recovered. That pattern of selling low and buying high — or worse, never getting back in at all — is the single most damaging mistake an investor can make.

In our January Viewpoint we suggested investors make several financial resolutions. We want to emphasize the third one here, which depends on your life stage. If you are still working and accumulating assets, we always encourage contributing to your investments on a regular basis. Dollar cost averaging helps smooth both portfolio volatility and the emotional volatility that comes with it. For investors still in the accumulation phase, market corrections offer the opportunity to own more shares at lower prices for future growth.

If you are in or nearing the retirement stage, this is a good time to have a conversation with your advisor about whether an asset allocation adjustment makes sense. Not as part of any market timing or knee-jerk reaction to current events, but as recognition that for most people, as both their assets and age increase, their tolerance for risk naturally declines.

At Parallel we continue to manage your assets with an emphasis on diversification, quality and risk management. Please reach out to us with any questions.