What Should You Do About the Market?
The recent stock market volatility may be a little unsettling to some investors,
especially for new clients of Petersen Hastings. Even some “seasoned” clients may
wondering if this time is “different”. As I complete my 29th year at Petersen
Hastings, the one constant has been the regular journeys through both Bull (prices
rising) and Bear markets (prices falling). This price volatility has and continues to be important to investors. Smart investors require additional reward for accepting additional volatility. The historical reward for this risk has been significant, with stocks providing approximately 6.5% annual compound return in excess of Treasury Bills from 1926-2014. The additional annual compound return was over 7.5% from 1982-2014. Therefore when domestic and international stock markets go through the ups and downs that we have experienced lately, it reinforces the risk premium for stocks.
What does this mean for you? When we hear the news and see the markets fluctuating, we all feel a need to protect what we have saved. At moments like this, the best course of action for any investor is to stay the course. It may not feel like it today, but the market has historically rewarded those who are willing to take the risk of investing in the stock market.
Our memories are short, but there is good news! The good news is that approximately 75% of the annual US Stock Market returns have been positive since 1926 and only 25% have experienced negative returns.
Some clients may wonder why we do not attempt to time the market and exit when the market drops and re-enter when the market is poised to recover. Although we wish there was a reliable “crystal ball”, such a thing does not exist in today’s world. There are those that would suggest that they know how the stock market is going to perform over the next few days, months, or years but this is a very dangerous strategy. Remember that 24 hour financial news stations improve their ratings during periods of turmoil, so they have an incentive to perpetuate investor fear. Once investors exit the stock market, they are faced with the problem of when to get back into the market. As the chart below indicates, the problem with trying to time the return to the stock market is that missing only a few positive stock market days can have a negative long term impact on your goals and objectives. It is best to ride out the storm with a broadly diversified, low cost and tax-efficient portfolio that is part of a plan to fit your individual needs and your risk tolerance.
Clients that have been interested in increasing their stock exposure for the long-run (not market timing) may wish to take action. Clients that are looking to reduce their stock market exposure may wish to temporarily postpone taking action.
As always, we encourage you to speak with your Petersen Hastings advisor if you have any questions about your portfolio and/or individual needs and risk tolerance.
August 25, 2015
By Jeff Petersen, CEO