The S&P 500 is down about 8% already this month. Many other quality investments are down even more than that. I thought it would be appropriate to reach out to everyone and attempt to cut through some of the noise you may be hearing from the media.
Watching your account decrease almost daily is painful, and we certainly do not take this lightly. Investing is a very emotional experience. This emotional rollercoaster is the reason that people typically do so much worse than the markets as a whole. It is easy to get caught up in the short term gyrations of the stock market and make emotional decisions. Unfortunately, these types of decisions can prove more harmful.
What has happened so far this year typically happens on average about once every two and a half years. This is not abnormal for the stock market. Of course, this is not the message you will hear from the financial media. They are desperate to capitalize on these events because they need viewers and listeners to maintain their ratings. What was the excuse the news media gave us for the near 19% market drop in late 2011? Oil was very expensive and China was well on its’ way to overtaking our economy. The sky was falling. What is the reason the news media is postulating for our current market drop? Oil prices are too low, and China’s stock market/ economy is collapsing.
It always beneficial to understand the motives of any company. CNBC is a commercial venture owned by NBC Universal which, in turn, is owned by Comcast. CNBC’s purpose is to generate ratings and income for their corporate owners. They do this by generating enough angst in their viewers to keep them engaged. Our advice is the same as it has always been; turn off the TV (or at least change the channel). The financial media has no clue why this market is behaving this way and cannot predict if this will continue or turn around. The media tries to convince you that this time it is different, and that the sky is definitely falling. We know that this time is not different.
So what should we do now? First, you should pull out your latest statement and take a look at your portfolios. Our quarterly statements are simply divided as follows: equities, fixed income and cash. Take note of the amount of money you have in your cash and fixed income accounts. The equity portion of your portfolio typically generates between 2% – 3% dividends on an annual basis. If you are taking distributions from your accounts, ask how long will the cash, fixed income and dividends last? If you are uncomfortable with this margin, you need to contact us. Next, after this volatility passes, we may need to readdress your overall allocation. If the percentage in low risk investments like cash and fixed income makes you feel uneasy, this market correction may offer opportunities for your portfolio.
As mentioned in our quarterly newsletter, we are making strides to address each taxable account for opportunities to do some tax loss harvesting. We now have access to Schwab’s Institutional Intelligent Portfolios. These portfolios do tax loss harvesting on a daily basis. Give us a call if you would like to discuss whether or not this is a good fit for some of your accounts.
Bottom line? This too shall pass. The market is volatile. There is a strong philosophical discussion that hypothesizes volatility as the only reason that we get a return premium in stocks versus other investments. The best course of action is to wait it out. We waited it out together in 2009 and 2011, and we need to wait this one out too.
How many views do you think CNBC would have if their lead story was “Markets Behave Normally and Investors React As Usual”?