Stay the Course, Stay the Course, Stay the Course
Investors are being tested by the stock markets: Can they stay the course? Should they? Take a look at a few charts of market performance over the long term to see the case for sticking with a diversified portfolio.
With equity indices crossing into bear market territory, it's easy to get anxious seeing your account balance rise and fall several percentage points each day. Although the situation we face today is unique (coronavirus containment, oil price war, etc.), this type of market environment isn't. For well-prepared, long-term investors, now is a time to stay the course while evaluating potential opportunities as assets become oversold. Below we offer a series of charts detailing historical parallels and supporting the case for diversified portfolios.
The table below details the last several bear (or close to it) market drawdowns dating back to 1987. While you often hear about the magnitude of the drawdown (red numbers), what's less discussed is the performance of the next 12 months, or the green numbers. Many of the best all-time trading days come within a month of the worst trading days, and sitting out from these best days can have a material impact on long-term performance.
S&P 500 Biggest Declines and Following 12-Month Performance
To view chart at full size, click here
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
It's tempting to try to time the market, but that requires two important timing decisions — when to sell and when to buy. A few small miscalculations of either move can have a significant impact on results. As seen below, missing out on just the market's top 10 performing days over the past 20 years would cut the gains on a $100,000 investment by about half.
Impact on a $100,000 Portfolio of Missing the Market’s Best Day
" target="_blank">To view chart at full size, click here
Looking back over the past decade, or century for that matter, there have been plenty of excuses to sell stocks. Just over the past bull market, we've had the Greek Debt Crisis, the introduction of negative interest rates, an Ebola outbreak, Brexit, and a global trade war, just to name a few. Amid all of this, stock markets have still managed to produce impressive gains.
" target="_blank">To view chart at full size, click here
Many will offer opinions, but our view is that it's nearly impossible to predict how this crisis will unfold. What's perhaps more likely, is that volatility will remain elevated in the coming weeks and potentially months. Given this framework, our belief in diversified portfolios remain.
The Case for Diversification: S&P 500 Index vs. Diversified 60/40 Stock/Bond Portfolio
" target="_blank">To view chart at full size, click here
Conclusion: Living through these periods of market uncertainty is rarely a fun exercise, but these challenges will occur occasionally. It's important to remain calm and stay focused on the long term.
For more information or to discuss further, please email me
or call me at 203.409.1270.
Disclaimer: Summit Financial, LLC. is a SEC Registered Investment Adviser ("Summit"), headquartered at 4 Campus Drive, Parsippany, NJ 07054, Tel. 973-285-3600. It is provided for your information and guidance and is not intended as specific advice and does not constitute an offer to sell securities. Summit is an investment adviser and offers asset management and financial planning services. Indices are unmanaged and cannot be invested into directly. Data in this report is obtained from sources which we, and our suppliers, believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. The Standard & Poor's 500 Index (S&P 500) is an unmanaged group of securities considered to be representative of the stock market; the MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index designed to measure the equity market performance of developed markets, excluding the U.S. and Canada; the Bloomberg Barclays U.S. Aggregate Bond Index is a market capitalization-weighted index comprising Treasury securities, Government agency bonds, mortgage backed bonds, corporate bonds, and some foreign bonds traded in the U.S.; The Russell 2000 Index is a market-cap weighted index comprised of the smallest 2,000 companies within the Russell 3000 Index. Consult your financial professional before making any investment decision. Past performance is no guarantee of future results. Diversification/asset allocation does not ensure a profit or guarantee against a loss.
Disclaimer
Investment advisory and financial planning services are offered through Summit Financial LLC, an SEC Registered Investment Adviser, 4 Campus Drive, Parsippany, NJ 07054. Tel. 973-285-3600 Fax. 973-285-3666. This material is for your information and guidance and is not intended as legal or tax advice. Clients should make all decisions regarding the tax and legal implications of their investments and plans after consulting with their independent tax or legal advisers. Individual investor portfolios must be constructed based on the individual’s financial resources, investment goals, risk tolerance, investment time horizon, tax situation and other relevant factors. Past performance is not a guarantee of future results. The views and opinions expressed in this article are solely those of the author and should not be attributed to Summit Financial LLC. Links to third-party websites are provided for your convenience and informational purposes only. Summit is not responsible for the information contained on third-party websites. The Summit financial planning design team admitted attorneys and/or CPAs, who act exclusively in a non-representative capacity with respect to Summit’s clients. Neither they nor Summit provide tax or legal advice to clients. Any tax statements contained herein were not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state or local taxes.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Michael Aloi is a CERTIFIED FINANCIAL PLANNER™ Practitioner and Accredited Wealth Management Advisor℠ with Summit Financial, LLC. With 21 years of experience, Michael specializes in working with executives, professionals and retirees. Since he joined Summit Financial, LLC, Michael has built a process that emphasizes the integration of various facets of financial planning. Supported by a team of in-house estate and income tax specialists, Michael offers his clients coordinated solutions to scattered problems.
-
Stock Market Today: Stocks Pause as Investors Assess Fed Policy
The Federal Reserve met expectations with a quarter-point rate cut.
By David Dittman Published
-
Fed Cuts Rates Again: What the Experts Are Saying
Federal Reserve The central bank continued to ease, but a new administration in Washington clouds the outlook for future policy moves.
By Dan Burrows Published
-
Stock Market Today: Stocks Pause as Investors Assess Fed Policy
The Federal Reserve met expectations with a quarter-point rate cut.
By David Dittman Published
-
Fed Cuts Rates Again: What the Experts Are Saying
Federal Reserve The central bank continued to ease, but a new administration in Washington clouds the outlook for future policy moves.
By Dan Burrows Published
-
How Intrafamily Loans Can Bridge the Education Funding Gap
To avoid triggering federal gift taxes, a family member can lend a student money for education at IRS-set interest rates. Here's what to keep in mind.
By Denise McClain, JD, CPA Published
-
Stock Market Today: Dow Jumps 1,500 points on Election Outcome
The removal of election uncertainty unleashed a powerful rally in equity markets.
By Dan Burrows Published
-
Market Reaction to Election Results: What the Experts Are Saying
Jobs Report Election uncertainty has been removed from the list of investors' worries, helping equities soar.
By Dan Burrows Published
-
Two Consequential Tax Cases You May Not Have Heard About
The Supreme Court's decisions in these cases create uncertainty about challenging IRS regulations and guidance. Expect more litigation to follow.
By John M. Goralka Published
-
Stock Market Today: Stocks Rise Amid a Broad-Based Election Day Rally
All 11 sectors closed in the green on Tuesday, and all three major indexes added more than 1%.
By David Dittman Published
-
Stocks Rally on Election Day as Markets Brace for Volatility
All three major indexes opened higher as voters chose the 47th President of the United States.
By Dan Burrows Published