State of the markets
Five years ago we were in the midst of the “great recession”. There were parallels being made between our circumstance at the time and the Great Depression. The US government was bailing out financial institutions and auto companies. We all knew someone losing a job. It wasn’t the most stress free time as a financial advisor either. Uncertainty was all around, and yet it was important to advise against panic-based decisions. Emotions have never been an investor’s friend. In down markets it cheats investors of patience and time that rewards an investor. To our clients’ credit, 99 percent did not let emotions drive decision making, and they have been rewarded for it. Is it really possible that come this March it will be 5 years removed from the bottom of “The Great Recession”? Yes, it was March 9th, 2009 that the Dow Jones Industrial average closed at 6,547 reaching a 12 year low. Now, almost 5 years later and at the start of a new year we have once again seen the Dow Jones Industrial Average reach another all-time high of 16,588 at the close of markets December 31st of 2013.
So is this a letter to tout that heeding our advice is always the best strategy? Not quite, it is actually just a friendly reminder about the opposite. Since 2009 we’ve been told it will be a slow growth recovery…and it has been economically, in spite of the markets recovery. We have been told that there are many challenges still facing the global economy…and there are. We are told the pace at which our national debt is increasing is not sustainable over the long-term…and that is true. Five years ago we counseled clients to remember history and the fact that markets have always recovered and rewarded the patient and non-emotional investor. Now five years into a recovery it is probably time to again remind investors that corrections can and will occur. In fact, it is interesting to note that the average equity market intra-year decline is 14.7%. That’s right. On average, at some point during a calendar year, the markets see a 14.7% correction (decline). We are not out of the woods, and really as an investor, you are never out of the woods. It is just life. However, in spite of “life”, the S&P 500 has returned positive returns in 25 of the last 33 years.
Are we suggesting that we can predict a correction? Absolutely not, it isn’t possible and in fact over the last few years, those that thought they could predict corrections have failed miserably. We’ve heard many doomsday scenarios since 2009 that haven’t come to fruition. Thus, we are simply trying to be a voice of reason reminding you that when a correction does come, don’t let it be a surprise. If we let it surprise us, emotion may return and try to rob you of future returns.
Additionally, while emotion can lead to panic in a correction, it is also known to lead more than a few to irrational exuberance in a bull market. Inevitably after the stock market has a great year, inflows into equities are higher the next year. Do not let the significant equity returns lead you to deviate from your risk tolerance and sound diversification amongst asset classes. Staying invested according to what risk your are comfortable with and the risk required to meet your goals should always be the driving factor in your investment allocation.
We hope you enjoy the link below to the Market Outlook for 2014.