Suffice to say, these are unprecedented times with respect to the global pandemic. As difficult as it has been to digest, the market’s response is not without precedent. Markets have been digesting the dynamic plethora of information available and responding accordingly. Because we as investors cannot control market movements, these circumstances provide an appropriate opportunity to consider how history has treated long-term investors who have (and have not) stayed invested.

The graph below was presented in a 2018 client communication during yet another bout of volatility. It highlights the danger attempting to time market the market exodus and re-entry points.

It’s a natural human condition to seek an answer to “why” in the face of adversity, especially when financial security may be at stake. Financial markets are predictors, albeit imperfect, of future economic performance. Sometimes the answer is correct, but more often than not, the market under- or over-shoots the future performance.

No one knows the bottom of a given market decline. We can postulate, however, that every market crisis in the past has not halted the long-term, upward march of market performance. This is not to diminish the emotional impact during a given event but consider the following graph2 of subsequent returns of a balanced portfolio after past crises.

The following graph2 also depicts market recoveries in history when the S&P 500 has dropped by more than 20%. The subsequent bull markets are staggering in both amplitude and duration when compared to the corrections.

The astonishing speed of the current pullback is nothing short of attention-grabbing. The speed and magnitude of the drop understandably conjures up anxiety-fueled fear and a sense that an actionable response is warranted. But what can be done about this volatility? I’m reminded of some simple truths that are helpful to lay hold of during these uncertain times:

1. Volatility is normal -I’ve written extensively on this topic in the past, and the charts and graphs above depict most investors who participated in the markets last decade lived through two of the most volatile periods in history.
2. Market risk cannot be diversified away, however, risks unique to individual companies and sectors can be mitigated with proper diversification.
3. Markets reward long-term, disciplined perspectives. Resisting the urge to sell in down markets and become overexuberant in up markets insulates from the temptation to “time the markets”. The antidote to the fear in down markets is to maintain a perspective on the long-term goal you’re either working towards or have achieved in retirement.
4. Allocation decisions within portfolios should be revisited based on changes in goals and life circumstances. Volatility is a good stress-test to ensure that a portfolio designed to be appropriate for “all weather conditions” truly fits the pairing between risk-tolerance to goals.

If you have any questions about the allocation of your portfolio, I look forward to meeting with you to discuss your long-term goals and discuss an appropriate allocation. Your goals, not market predictions, are the most important criteria in determining your portfolio composition!
I look forward to speaking with you soon.

Best Regards,

Rich Cullen
Investment Advisor Representative
(509) 869-3907 (cell)
(509) 473-9483 x 104

Please note that my office has moved. My new address
is 502 W Riverside Ste 201, Spokane, WA 99201

1. Morningstar “Fundamentals for Investors – 2018” –
2. Information provided by Dimensional Fund Advisors LP

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