Making Friends with Volatility

August 26, 2015

August 26, 2015

The average investor is regrettably their own worst enemy; jumping in and out of their investments at precisely the wrong times. The result is less than satisfactory as they sabotage their financial outcomes by chasing short-term performance, buying high, then panicking, only to sell low. As fear recedes and greed seeps in the cycle is unfortunately often repeated.

Since 1950, there have been 34 years when the S&P500 Index experienced a double digit plunge and only four years when it didn’t see a correction of at least 5%. Despite all these drawdowns, the S&P500 returned 11% (compounded annually) over the period (Courtesy: EdgePoint August 2015). We concur with the folks at Russell Investments who belong to the “growing pains” camp rather than ascribing to the ”sky is falling” view regarding China. With more than US $3 Trillion in reserves, the Chinese government has both the ability and willingness to cushion the economy Courtesy: Russell Aug 2015.
We don’t pretend to know exactly what the future holds, but we can make some reasonable arguments founded upon long-term historical data. We know that market corrections occur regularly followed by recovery. Looking back over the medium term, since 2009, the U.S. market has experienced no fewer than 20 declines of 5% or more. Each was followed by investor optimism for the future of the economy. Each was an excellent buying opportunity to make additions to quality portfolios. We think the 21st decline since 2009 will present a similar opportunity… the storm will pass as it always does; eventually.
Your portfolio isn’t “the market” – we’re not immune to the broad market moves, however we work hard to differentiate your wealth from “crowd think”. We know that holding low-correlated asset classes provides significant diversification benefits to a portfolio; coupled with a keen focus on income; both from dividends and interest and while quite a boring mix, it’s one that has stood the test of time.
We structure your wealth in a proportion that matches your tolerance for the “ups and downs” taking into significant account your core life objectives – your goals, your dreams, present and future obligations you may have. It’s not a cookie cutter template, it’s an approach that’s unique to your individuality: a greater percentage of equities for those with a reasonable appetite for growth, fewer for those who are less comfortable with volatility. Assuming no major life events occur, we rebalance, stay disciplined and do not stray too far from your original allocation.”
Market corrections are not unusual, timing these types of pullbacks is very difficult to impossible. When they occur we view them as an opportunity.
Volatility is our friend and when viewed from the longer- term perspective it’s a key ingredient to your financial success.
Warmest Regards,
The Wooding Group