We believe that it is difficult if not impossible to try and time the markets and that investors are better off developing a long term asset allocation and sticking with it. We also believe that the longer term outlook (next 5 – 10 years) is extremely good for the broader equity markets. While we are not predicting a correction – market drops are a normal part of longer term growth and we may be getting a little spoiled.
Consider the fact that from 1900 – 12/31/2014 (source NED Davis Research) There have been:
388 drops of 5% or more – about 3.4 per year which would be @ 880 points on the DOW today
123 drops of 10% or more – about 1 per year or @ 1,760 points on the DOW today
32 drops of 20% or more – about 1 every 3.4 years
While we did have some significant volatility in 2013 we have not seen a large drop since 2008-2009 and therefore based on historical precedent we are due for a correction. As always past performance doesn’t guarantee future results but it can give us some insight when looking at more than 100 year of history.
The broader stock market indices have been positive on a total return basis in 11 of the last 12 years (2003-2014). The 1 down year that occurred since 2003 was a 37.0% drop in 2008. It is interesting to note that while the broader market has trended upwards over longer periods it does fluctuate both up and down. Over the last 50 years (i.e., 1964-2013) the S & P index has been down 47% of the days over that period. The split between up and down days during calendar year 2013 was 58% up and 42% down. We believe that for the majority of investors, equity investments should be viewed as longer term and assets that may be needed in the shorter term (2 – 3 years or less) should generally not be put into equities.
The S&P 500 stock index has gained an average of +10.0% per year (total return) over the last 50 years (i.e., the years 1964-2013). However, this is an average and there has not been any single calendar year in which the market actually gained +10.0% in the last half century. It’s also important to note that one cannot invest directly in an index and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary.
So What Should We Do?
Make sure that your allocation currently reflects both your long term needs and also your risk tolerance
Keep enough cash and short fixed holdings for six months planned expenses plus another six month emergency reserve
- Don’t fall prey to the emotions of either greed – investing too aggressively or fear – moving out of the markets when they are down
- Work with your financial advisor to make sure your plan accurately reflects your personal vision, needs, goals and risk tolerance. Make sure to communicate with your advisor when any of these change.
- Recognize that by reducing market exposure you may also increase the risk of inflation.
Please contact your financial advisor to discuss your personal needs, objectives and goals. We are here to help you with your planning and appreciate the opportunity to be your partner.
Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Be sure to contact a qualified professional regarding your particular situation before making any investment or withdrawal decision. Any opinions are those of Randy Carver and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Asset allocation does not ensure a profit or protect against a loss.
Sources: BTN Research, Yahoofinance.com, dowjones.com)