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Registered Investment Advisor
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Special Edition: Current market volatility |
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As you have most likely noticed, the markets have been experiencing a period of volatility as the new year, 2022 has begun. As a matter of fact, today is a perfect example of volatility and the risk of panicking. As we started putting this Special Edition newsletter together this morning, the Dow was down over 1,100 points, and the S&P 500 and NASDAQ were down almost 4% and 5% respectively. All of a sudden, late in the afternoon they quickly reversed, and all turned positive for the day, one of the biggest market turnarounds intraday ever. Now even with the fact that the day ended positively across the board, we want to still send this out as we expect more volatility to come, and want to help keep perspective.
The volatility started in with the Omicron virus quickly spreading and dampening enthusiasm for what had seemed to have been Covid-19 being less of an issue as more and more people became vaccinated. The market became further concerned about a change in stance with the Federal Reserve moving from a Dovish to more Hawkish tone with talks of reducing its bond buyback program and more rapidly increasing interest rates. Lastly, with Russia seemingly looking to move into the Ukraine, this confluence of events along with inflation concerns, has the market on edge.
This is why we focus on financial planning with our clients. It is exactly for these types of situations and times such as this. While we can never predict with certainty the exact length of time that this recent sell-off will last, history reminds us that the selling does not go on forever. History also makes us very aware that this is a fairly common occurrence, and it is to be expected from time to time.
Markets eventually do come back and do go back up. As you can see from the slide below provided by First Trust, intra-year declines are common. You can see in the slide, that the average intra-year decline in the S&P 500 has averaged about 14%, yet in most of the years the market still finished with a positive return.
For example, if you look back to 2020 when Covid-19 first appeared, the S&P 500 fell 34% from its peak yet still finished the year +16%. In 2009 during the Financial Crisis, the S&P 500 was down at one point 28% and still finished the year +23%. So, volatility is nothing new, we recognize and understand that it can be unnerving to go through and that it never feels good, however it is by taking on some level of risk, that you are rewarded with longer term returns that help to offset inflation and keep your money growing to get you through the rest of your living years. (**Please note - the accompanying slides may be hard to read in this format. You can click here to access the entire pdf, or go to our website, and you will find it under Guest Articles**).
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It is important to also remember, that we would never put all of our clients’ money into just the S&P 500 index, and why diversifying a portfolio helps to reduce risk and volatility in our clients’ portfolios. That doesn’t mean the account doesn’t go down in value, but it should help soften the blow during these periods of time while still allowing the account to grow over time. As you can see from the slide below, markets tend to overshoot to both the upside and downside. This chart shows you the performance of the S&P 500 Index during and after extreme down days. It also shows you the performance 1, 3, 5, and 10 years later. As you can see, volatility to the downside, is very often then met with a very strong snapback and positive return.
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As you can see from the next slide below, if we look back over time since the beginning of the Financial Crises in 2008, there have been numerous big news events that have “spooked” the market, and yet the long- term trajectory moves ever upward. It is important that long-term investors never take their eyes off the importance of taking a long-term view towards their investments and blocking out some of the short-term noise that can often lead to bad investment behaviors or decisions.
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Lastly, it is important to remind that this is also why we rebalance the accounts on at least a quarterly basis. Rebalancing is a systematic, non-emotional way of basically buying low and selling high. In a year like 2021 when the market went up most months, we were still selling stocks along the way up and taking profit. That can serve as a lag in an up year, but fast forward to when the market now experiences volatility, had we not rebalanced along the way our clients would feel more of a decline in their account values.
While we remain very calm during these periods of volatility, we never want to assume that others handle it as well as we do. So, if you are concerned, have questions, would like to speak, we always welcome the opportunity to have that conversation or meet to help keep things in perspective. We look to be always available for you, our valuable and loyal clients.
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The importance of why we focus on financial planning with our clients - exactly for situations and times such as this
Financial planning can best be described as the architectural schematics of your financial life. Before you build a new building, it must be designed and approved to insure it can withstand the stress of the weight, surrounding weather, etc.
The reason we spend so much time attempting to understand your spending habits, income sources, tax treatment, goals and objectives is to understand what the income needs will look like now and in the future. The first thing we discuss is the importance of all investors having a proper emergency fund. That emergency fund, at a minimum should cover at least 6 months of expenses, and generally we recommend one year. The reason we do that is we want to insure that our clients have enough liquidity to help ride out market disruptions, such as we are currently seeing. We then structure a portfolio that will likely outpace inflation enough to maintain your lifestyle, and yet still be able to weather the inevitable stress of extreme market turbulence.
This type of planning is vital to understanding how to allocate risk across various accounts. As most will hopefully remember, as we ran your initial retirement projections, we then asked to review them annually and we examined a range of probable outcomes. One such outcome is the “worst case” scenario, which is an approximate 5% statistical probability. Such outcomes already assume more severe results than what we are currently experiencing. So in essence, these type of events are already baked into the assumptions. Knowing that we have already accounted for this should hopefully help you rest easier during these turbulent periods. If you are still concerned, know that our doors are always open, as we pride ourselves on being available to our clients in a time of need. We encourage you to review with us these projections every year to insure you’re are still on track to meet your lifestyle goals.
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Market corrections: How much impact do they have?
As investors work their way through the latest round of market volatility, a number of fears often arise from investors. Questions such as:
- Is it different this time?
- Do I have time to recover now that I’m retired?
- How long does it take to make my money back?
These are common questions which are not unique to this particular market downturn. And each one has an answer. Please click here to access the article, which is also on our website, listed under Articles > Our Articles.
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If you have any concerns about this, or any other financial subjects and how they may relate to your own financial circumstance, please reach out to us at the contact information below:
Sincerely,
This communication is from Landmark Wealth Management, LLC, a Securities and Exchange Commission Registered Investment Advisory firm. The information in this email is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax, legal, or investment advice from an independent professional / financial advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Information and use of materials contained in this email, including text and attachments, is confidential and is for the use of the intended recipient(s) only. If received in error, you are hereby notified that any dissemination, distribution, or copying of this communication, or any of its contents, is strictly prohibited. If you have received this communication in error, please reply to the sender and delete the original message and any copy of it from your systems. Be also advised that email communications are not secure. All e-mail sent to or from this address will be recorded by the Landmark Wealth Management, LLC email system and is subject to archival, monitoring, and inspection pursuant to securities regulations. Please direct any matters regarding this policy to info@landmarkwealthmgmt.com
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Landmark Wealth Management, LLC
95 Broadhollow Road, Suite 102
Melville, NY 11747
(631) 923-2485
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