These last few months of market volatility have been trying for all of us. We are always looking to help position portfolios to take advantage of the future market environment, which is why we believe there are reasons to view this volatility as an opportunity. As market volatility increases, emotions start to have a greater influence on investment decisions for many investors. This can lead to decisions that negatively affect your portfolio in the long run.
Our theme for 2011, “slow but growing”, suggested buying on the dips. In June we warned that a market correction of more than 10% would probably happen soon. While it may be counterintuitive, we believe this volatility is an opportunity for appropriate investors to slightly increase equity exposure.
Highlighting the Volatility
From August 3, 2011 to November 2, 2011 the S&P 500 declined a mere 1.8%. However, investors had to weather a total move in the index of more than 1,392 points - 684 points up and 707 points down. Definitely not easy to stomach.
The months July through September of this year were especially volatile. Investors who decided to move out of the markets during this time missed out on the market surge during October. Even with all the volatility, as of December 5th the S&P 500 is up about 7% for the last three months, down almost 3.5% for the last six months, and just about breakeven for the year.
Our Thoughts on Europe and the US
We believe things are bound to get worse in Europe. This would mean continued volatility. Solutions proposed thus far have not focused on the structural and longer-term issues. Each EU summit seems to bring about more rhetoric but little, if any, change in the weeks that follow. We believe that a solution will eventually be reached, although it may seem drastic and involve rewriting treaties, countries leaving the Euro, or other significant ways to reduce debt levels.
Things are looking better on our side of the pond. The US is growing, albeit slowly, and companies continue to experience record earnings. JP Morgan’s projection for 3rd quarter operating earnings is $25.61, exceeding the previous peak of $24.86 set in the second quarter of 2011, and up roughly 19% from a year ago. Even more impressive is the revenue growth of approximately 13% year-over-year, indicating that earnings have been boosted by more than cost cutting. Unemployment also dropped to 8.6% in November. So while volatility may be high, these economic numbers are getting better.
Emotional Investing Decisions are Costly
As volatility rises investors are more likely to become anxious and want to make a change to their portfolios. This is where they often hurt their portfolios the most. It’s better to know your risk tolerance and have a diversified portfolio that allows you to get through volatile times without having your stomach drop.
Exiting the market during periods of high volatility can cause you to miss the upside of the equation. Periods of high volatility are often followed by periods of above average returns and lower volatility.
The Risk Gut Check
If you felt your stomach drop over the last few months while watching your portfolio, or if you sold out 100% and are now thinking of getting back in, you’re probably taking too much risk. It’s a good idea to do a gut check and really ask yourself if you are comfortable with your risk level. The key is to find a balance that allows you to go through volatility comfortably.
Defend Yourself from Volatility
Two ways to get through the rough periods are to focus on the longer-term and be diversified. This can actually lead to better returns than if you were to let emotions influence your investment decisions.
JP Morgan’s Chief Market Strategist Dr. David Kelly notes that over time, the zigs tend to offset the zags, so long-term investors (5-15 year time horizons) don’t have to worry that much about daily volatility.
A portfolio diversified 50% to stocks and 50% to bonds had a best one year return of +32% and a worst one year return of -15%. However, looking at returns for the same portfolio over five-year time periods from 1950-2010, there wasn’t a single period in the last 61 years where you would have earned less than 1%. Click here to see a chart that shows the range of total returns for stocks, bonds and a 50/50 blend portfolio.
We’re Always Here
Think about the last time you called a friend for advice and why you called them. It’s often to get an unbiased outside opinion that will hopefully provide clarity to a situation. We have the experience to help and act as that voice with the understanding that investing is emotional.
There are several reasons we review your portfolios at least quarterly, and making sure you’re properly diversified is one of them. If you haven’t gone through our Envision process, be sure to call your Wealth Strategist at (800) 541-7774 ( or email ) and set up a time to go through one. Most, if not all, of our clients find it very insightful and helpful when it comes to planning and peace of mind.
Disclosure
The S&P 500 covers 500 industrial, utility, transportation and financial companies in the U.S. Markets. The value-weighted index represents approximately 75% of the NYSE market capitalization. The S&P 500 is unmanaged and does not take into account any fees or expenses of investing in the individual securities tracked. Individuals cannot invest directly in an index. Historical performance of the S&P 500 is provided exclusively for comparative purposes only, so as to provide relevant information to assist an individual client or prospective client considering investment strategies. It should not be assumed that manager strategies and/or individual client account holdings will correspond directly to the S&P 500.
This documentation is being sent for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any states where such an offer or solicitation would be prohibited by regulations. Accordingly, no client or prospective client should assume portfolios presented (or any component thereof) serve as the receipt of, or a substitute for, personalized advice from WrapManager, Inc. or from any other investment professional. Past performance may not be indicative of future results. Therefore, you should not assume that future performance of any specific investment or investment strategy made reference to directly or indirectly by WrapManager in its literature or otherwise will be profitable or equal the corresponding indicated performance level(s). Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable for your investment portfolio. While we believe that diversification in an important aspect of a proper investment plan, diversification does not guarantee a profit or protection against loss in a declining market.
WrapManager, Inc. is an investment advisor registered with the SEC. The associated persons of WrapManager, Inc. may also be securities agents with Prospera Financial Services, Inc., a registered broker/dealer, member FINRA/SIPC. Opinions expressed are those of WrapManager, Inc. and are subject to change without notice and are not necessarily those of Prospera Financial Services, Inc., its directors, parent company or its affiliates. Securities offered through Prospera Financial Services and cleared through First Clearing, LLC which is an affiliate of Wells Fargo. Wells Fargo and WrapManager, Inc. are not related entities. Individual money managers presented in this report and WrapManager, Inc. are not related entities. However, WrapManager does recommend the use of the money managers presented to clients and shares client fees. The level of due diligence performed varies by money manager and product.