October has reared its notoriously ugly side with after effects still being felt this month of November. Due to the major selloffs that occurred in past October’s, the Stock Trader’s Almanac has labeled this month as “the jinx month.”
According to the Almanac, October has lived up to the “jinx month” reputation as follows:
- The 554-point drop on October 27, 1997
- Back-to-back terrible years in October 1978 and 1979
- Black Friday on October 13, 1989
- The beginning of the “Great Recession” in October 2008.
No one escapes some degree of volatility during severe declines in the market unless they are completely out of the market. Even “investment darlings” such as “FAANG” (Facebook, Apple, Amazon, Netflix and Google) will very often take the brunt of these declines. Consider that stocks such as Amazon, NVIDIA, Apple, Google and several other technology stalwarts are being pummeled of late and you will understand why the pain is mutual. There have been significant declines in the growth sectors of technology, biotech and health care as well as in energy, materials, communications, industrials including defense and aerospace, and consumer cyclicals which contain online retailers such as the mighty Amazon.
Our team continues its best efforts, yet our clients’ portfolio values will drop as a consequence of these declines. Thankfully, we have been navigating the volatility of the markets for over three decades and therefore our clients have faith in our abilities. They understand our commitment to their well-being and our goal to proactively communicate our efforts to mitigate risk and to seek opportunity on their behalf.
It is important to distinguish a falling market and lower statement values from “lost money”. Until investments are sold for a loss there is no loss! Oftentimes at this time of year, we seek losses to offset gains or to create a write-off against ordinary income in order to lessen taxes.
Investment performance will be a function of the underlying allocation. It is mostly a matter of math relative to how your account is invested and how the underlying sectors performed. Therefore, if your portfolio was a 50/50 mix and the S&P 500 was down 6% and the bond market down 3% then, you should expect to be down around 4.5%. If your portfolio was technology heavy with large companies like Amazon, Google and others down in the 20% area, you would see a larger decline than the overall market because of falling values in these technology index dominating companies. The key is making sure that the overall allocation and portfolio mix meshes with your objectives and risk tolerance. Therefore, it is important that clients communicate regularly with their financial advisor to inform them of changes in their situation or goals. Together the advisor and the client may determine the impact of their overall asset allocation.
It is important to note that investment returns are not linear. Instead, they rise and fall like a roller coaster. If participating in the stock market was a steady ride, with returns being “notched” in a linear and progressive manner, there would be no need for banks since everyone would welcome stock market returns without hesitation. Every investment contains some level of risk. The stock market has volatility which tends to affect those not committed to a long-term investment plan. Studies have shown longer holding periods in the market have much less incidences of loss.
The attention to the market and data available on a real-time and consistent basis has made the volatility more visible. One needs to consider other investment choices and risks which are not as apparent or sensationalized as market risk. Inflationary-risk affects the most conservative aspects of investing cash, such as bank holdings and short-term treasuries. Although the value of these investments may be insured or guaranteed, inflation is erosive. When investing funds in this manner the risk is that over time your money loses purchasing power and rather than a loss of money in the market you risk running out of money by not accumulating enough through conservative measures to outpace inflation.
Diversification is still the key to success. Understanding your needs, goals and tolerance for risk should dictate the guidelines for allocating your portfolio. RZ Wealth incorporates as much safe assets in our allocation plans as practical using individual bonds, FDIC-insured CD’s and annuities to target specific returns or maturity values.
We call this style of investment, “Defined outcome strategies”. Rather than a client’s financial success being subject to hypothetical market returns, we diversify portfolios with instruments that have specific maturity dates, value and have guaranteed minimum rates or have FDIC protection against a loss of principal. On the secondary market, these assets will fluctuate in value until the date of maturity, so there is risk in selling these instruments prior to maturity which is avoided.
In conclusion, market risk is a part of the process of being an investor when seeking asset classes that will allow you to beat the erosive effects of inflation. A proper asset allocation plan will only put the funds needed into higher levels of risk in order to fulfill your goals and objectives. When the market is highly volatile even presumably safe assets will experience higher levels of market risk. This occurs as people seeking sources of cash create a higher level of selling which will drive down prices. The only answer is to hang on for the roller coaster ride that has historically proven successful to investors with a longer-term investment horizon and who have built a portfolio that is allocated and diversified relative to needs, objectives and risk.
We are happy to provide a second opinion to determine how your current investment plan is suited to your personality and objectives. Please call: 610-627-5920 for your free consultation.