We are now experiencing the market correction that has been anticipated and that we have spoken about for the last few years. This dip is neither surprising nor something that is not part of normal market movements. The surprising thing is that it has been almost four years since we experienced such a drop.
Below we discuss a little bit about where we are at. We will also discuss what to do now and what we expect in the longer run. As always we are aware of what is happening and are here for you. Most importantly our investment approach is a proactive – rather than reactive one and therefore your portfolio has been allocated in anticipation of these types of short term events. This dip may provide an opportunity to ad to equity positions at attractive prices and also may lead to some very beneficial government policy for the long term. We look at that keeping in mind that there may be an opportunity that many will miss due to media driven fear.
We understand that some people have a fixed income and or portfolio and cannot add to their positions at this time. Market dips present a good opportunity to at least rebalance if not to add to equity positions at attractive prices. The other beneficial outcome is that this may drive government policy that will benefit us in the longer (2 – 5 year) run. As surely as we have these types of corrections the media, and other fear mongers, will shout that ‘this time it’s different’. We believe it’s not. The media will focus on the short term and the negative – we are investing for the rest of our lives and must not fall prey to fear that causes us to hurt our planning.
There are two primary reasons being cited for the market drop. The primary one is China has devalued their currency again in the face of questions about their development model struggling to maintain growth. The second is concerns about the FED raising interest rates in the United States. Today (Monday August 24th) China stocks fell 9% and all Asian markets suffered major losses. Europe’s major indexes opened about 3% down before trimming those losses slightly. The US markets dipped sharply at the opening as well.
What to do now?
First and foremost it is critical not to panic. We cannot say how long the correction will last but we do feel that the sharper the dip the faster the recovery. It is impossible to try and time markets. Getting out and ‘waiting for things to get better’ simply doesn’t work. Aside from the fact that you may miss some or all of the upswing there may be negative tax implications and other expenses involved. You are investing for the rest of your life not just the rest of the year. Your advisor is here if you have concerns, however, if we feel changes should be made we will proactively contact you.
What happens next? Nobody can say how long or how steep a correction will be and the past does not guarantee the future. We believe that the steeper the dip the quicker the recovery and we also believe that will be the case now. It is interesting to note that there is now more talk that government regulation may be hurting the markets. As we are clearly in an election season we may see regulations and other government red tape reduced that could ultimately fuel accelerated growth for individual companies and markets over the next three to five years.
A few other points to remember:
Market corrections are a normal occurrence, it’s been four years since we’ve a 10% downturn (remember Greece in the summer of 2011 which produced a 20% correction in the market) so we’ve gone an unusual amount of time without one.
Market corrections typically happen once a year on average.
Our proactive approach has your portfolio positioned to cover your short-term needs and long-term objectives, so no structural changes are needed to your portfolio unless your needs and objectives have changed
Corrections in the markets may give us the opportunity to rebalance your portfolio and harvest losses to help offset future tax liabilities from interest, dividends and capital gains generated in your portfolio
The average investors returns over the last 20 years (Dalbar Study) is miserable because they tend to sell diversified quality investments when the markets go down, then only to recommit their capital when the price of the investment has risen above the price they sold at – in turn selling low and buying high. This is why we don’t make significant changes to the portfolio during heightened levels of stress in the markets, our approach is focused on your long-term objectives such as not outliving your savings.
Most of the media’s job is to sell advertising, not spread accurate and unbiased information. This is why we don’t watch the investment shows, although we read a considerable amount of research from veterans throughout the financial industry which helps refocus on attention to the big picture.
Finally, as a firm we do not believe in market timing and will not support such a strategy.
This will be a frightening time and we are here for you, but we believe this is not any different than any other correction over the last 100 years. Take advantage of the opportunity and ignore the media.