Off to a Slow Start
Paul Morrone
Wealth Manager
After a hectic holiday season that was once again tainted by a tsunami of COVID cases, many were looking to the start of 2022 as a chance for a fresh start. Financial markets seem determined to upend these plans, with all major domestic and global stock indices posting numbers in the red through January. It’s as if the 2022 selloff coincided with the ball dropping in times square, with 12 out of the first 18 trading days of the year ending in the red. While I’m sure there are some fun statistical facts surrounding these circumstances that can easily make you feel better (or worse!), the reality is that market fluctuation is normal and expected.
As planners we remind our clients that this type of volatility is the price you must pay to reap the rewards that equity markets can provide. Using the S&P 500 as an example, the last three calendar years (2021, 2020 and 2019) yielded enormous gains of 28.7%, 18.4% and 31.5%, respectively. The most recent calendar year in which the S&P posted a loss was 2018, when it was down a mere 4.4%. The 2018 pullback was immediately preceded by 9 consecutive calendar years where gains were realized in the index, varying widely from the worst return 1.38% in 2015 to the strongest return of 32.39% in 2015. This is not to say, however, that each of these years was not without drama, as one or more pullback of at least 10% occurred in virtually every year in the history of S&P.
We’re also here to remind you that the S&P 500 is NOT the end-all-be-all when it comes to markets, performance and benchmarking. I point this out as it is widely used and published, and it’s a number that many focus on, along with the DOW. The DOW seems to generate headlines more because of the relatively larger daily ‘points’ swings that it experiences relative to the S&P because of its higher index value at ~35,000 vs ~4,300 for the S&P 500. Think of it from a marketing perspective – which article are you more likely to click on:
• DOW melts down, drops 1,050 points, or;
• S&P 500 melts down, drops 130 points
It doesn’t take a whiz to figure out which article is going to garner more clicks. Ironically, they say virtually the same thing! Both point drops illustrated, above, represent a 3% decline in the respective index. That’s not to discount the materiality of a 3% move in a day, but should help to see why we see the DOW in the headlines more often than any other index, especially as its relative value continues to increase.
I’ll spare the rather technical and boring commentary about the inherent differences between the DOW and the S&P 500 – of which there are many. There is plenty of reputable information on Google for that. But what I will say is that a well-diversified portfolio will include exposure to the underlying stocks in these published indices, but that will only be a piece of the puzzle. The key point is that we want, and expect, the performance of a diversified portfolio to vary, sometimes greatly depending upon the investment objective, from the performance of the DOW or the S&P. This is by design, and while you may experience portfolio movements that may, on the surface, seem to correlate to US equity markets, that is more of a façade than anything.
Remember, a well-crafted and comprehensive financial plan should account for investment volatility and sequence of return risk. This includes a thorough assessment (and ongoing reassessment) of your risk tolerance, although any seasoned planner will caution you on letting your risk tolerance change with market conditions. Euphoria and confidence will persist as market prices rise (often with the largest ill-timed purchases at the top), followed quickly by fear and panic as prices fall (leading to even more ill-timed sales at the bottom). This creates the negative double whammy of buying high and selling low – a trader’s worst nightmare.
The better approach – remained disciplined, control what you can control, and view short-term volatility as an opportunity rather than a threat. Long-term investors are rewarded for their patience, which is undoubtedly tested year in and year out.
So, in the face of volatility, uncertainty and uneasiness, what is the best course of action? Just like you’d train a child to take a deep breath to calm them down when they are angry, its best to pause and use logic, rather than emotion to frame your investment decisions going forward. For our clients, we discuss the opportunities available during times of volatility, and review planning items that may benefit from volatile equity markets. These include, but are not limited to:
• ROTH conversions
• Gifting
• Funding 529 plans
• Accelerating retirement plan contributions
• Funding trusts
• Tax loss harvesting
• Portfolio rebalances
• Investing of excess cash
• Freezing asset values in estates
Should you have any questions, please give us a call.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
All investing involves risk including the possible loss of principal. No strategy assures success or protects against loss.
The content is developed from sources believed to be providing accurate information.
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