History, Repeat Yourself Already!
By: Ryan Johnson, AAMS® and Joseph Calhoun, CFP®
It is certainly not fun to watch investments fall but history tells us that they always will at some point. Nobody knows when, why, or how much – what we do know, though, is that they will eventually go higher, if history is any indication.
In an examination of historical short-term losses in the S&P 500 and its subsequent period returns, Michael Batnick, CFA (@michaelbatnick) shows that the further stocks fall, the greater annual returns you can expect going forward. For example, if you had a drawdown of 25-30%, your annualized average rate of return over the next 3, 10, and 20 year periods were 8.5%, 6.9%, and 9.6%, respectively.
This article caught my attention when he wrote it this past Monday, but it is even more revealing a mere 6 days later, as the Dow Jones Industrial Average fell an additional 17.3% in a week, and off -35% from its February 12 peak.
If you can invest new money for long term goals, you will look back on this opportunity and wish you’d done something or be happy that you did something – it’s up to you (with people like us to help you do it!)
This may seem less reassuring for those who are already invested; but, this may be a good opportunity to rebalance your portfolio to your target asset allocation. For example, if you previously considered your risk tolerance and your timeline for investing money, and you determined a 75% equity (“stocks”) and 25% fixed income portfolio was suitable for you, your portfolio may now be closer to a 65% equity and 35% fixed income portfolio just due to the recent market volatility. A rebalance would sell some fixed income positions and buy equity positions in order to bring your allocation into your previously defined balance, increasing your equity exposure appropriately while their prices are low.
What Michael Batnick illustrates shows us that staying in the equity markets during the selloff is going to improve your long-term returns, and appropriate investment of cash can enhance portfolio returns regardless of timing it perfectly at the hypothetical “bottom”. If you would like to discuss your plan and investment strategy, Symphonic Financial Advisors are here to help.