Broker Check


November 14, 2018

U.S. stocks have been rising ever since the Great Recession ended. Along the way, there have been multiple times when companies have suffered bouts of decreased prices. We just experienced one of those bouts of volatility in October when the U.S. stock market declined approximately 10% from a recent high.

Many pundits have been quick to assign blame to rising interest rates, the lengthening trade negotiations, the weakening impact of tax stimulus, and even mid-term elections (and, in some cases, all of the above!). The truth is that we don’t know, and we likely will never know, what caused stock prices to fall.­

What we do know is that stock market price swings are normal and expected. In fact, from 1945 to September 2018, the stock market has declined by 10% or more 55 times. That means investors are faced with a decline of 10% or more every 16 to 17 months.

We also know that investors are typically rewarded for tolerating market uncertainty. So, the ups and downs we experience from time to time are the price we pay for the outsized returns we have received, and expect to receive, from our stock investments.

A quick example will help make this point. Over the past 20 years ending September 30, 2018, putting our money into safe, 30-day Treasury bills earned us an annualized 1.8%, but investing in the S&P 500 Index earned us an annualized 7.4%. In dollar terms, $1 invested on October 1, 1998, would have grown to $1.42 in short-term U.S. Treasury Bills, while that same dollar would have doubled more than twice to $4.19 if invested in stocks. It absolutely was a rocky ride for stocks over the past 20 years (recall that we experienced two major bear markets), but we were rewarded for being willing to ride through many market ups and downs.

Given that stock prices do swing and that they don’t move in a straight-line, we diversify our investments among multiple asset classes. We continue to be invested in large and small companies, non-U.S. stocks from developing and emerging countries, real estate, and bonds. While we don’t expect all these investments to deliver diversification benefits at the same time, we feel we use enough to have one or two of them provide some benefit.

Right now, our preference for short-term, high-quality bonds has been helping our portfolio. They aren’t as sensitive to the rising interest rates, and they are now offering a much better yield than they were just three years ago. These investments help provide stability when our stocks are volatile.

While market volatility makes some investors nervous, we take comfort in knowing that we’ve seen this before and that we’ve historically been rewarded for staying the course. Given this, we don’t foresee the need to make any changes to our approach at this time.

If you have any questions, please feel free to reach out.

Source: Morningstar Direct 2018 and Bespoke Investment Group. Declines of 10% or more were calculated anytime the S&P 500 declined 10% or more following a gain of at least 10%. S&P 500 is an index of U.S. large company stocks. 30-Day Treasury bills are one-month U.S. Treasury bills. All indexes are unmanaged baskets of good not available for direct investment. Past performance is not a guarantee of future results.