You’ve likely noticed the heightened market volatility over the past few weeks. If you haven’t, congratulations! You are one of the few people in today’s society who can turn off your phone, television, and radio. Unfortunately, with the interconnectivity of today’s world, news travels fast, and with news comes emotions.
With the already heightened global tensions, the unprecedented restructuring wave going on across the federal government, and a wave of tariffs, the like of which the world hasn’t seen since the 1930s, it’s easy to imagine that the U.S. economy may be impacted in the near future, if not already. Each day, recessionary & inflationary fears are becoming mainstream and heightened, especially as panic & concern flood into the financial markets, inciting more concern and panic.
During periods of market decline, many investors make a natural emotional decision to sell their investments to salvage what money they can before “it’s too late.” This emotional decision people enact is based on the premise that market losses hurt more than market gains feel good. It never feels good to lose money! Unfortunately, when an investor acts on an emotional impulse, the knee-jerk reaction often has an opposite unintended consequence.
While challenging to do, being a long-term investor requires patience during tough times. However, being patient is tough in itself. During the tough times, you might feel as if you should be doing something to stop the bleeding. When, in fact, it’s the counterintuitive thought that often provides the most rewards. Investing during downturns or staying the course, typically produces the best long-term outcome. Market downturns are a natural part of the market cycle. Some downturns are fueled by economic data or tariffs, as we are experiencing now, while other downturns do not seem to have a major catalyst outside of extended valuations.
A JP Morgan study revealed that seven of the ten best days in the S&P 500 over the past twenty years occurred within two weeks of the market’s ten worst days. In fact, when you missed those top ten market days over those twenty years, you reduced your annualized return by almost 50%. Furthermore, missing the forty best days over the twenty years resulted in a negative annualized return. There are many other studies conducted by various firms, all of which produce similar results. The answer becomes clear: successful investing is about time in the market, not timing the market.
As your team, we’re actively monitoring the market and economic developments. Over the past couple of years, we’ve been taking measured steps to position your portfolio appropriately. Here’s what we’ve done & will continue to do:
- Maintain our long-term focus – Short-term volatility doesn’t change the fundamental principles of sound investing. We believe that long-term investing requires long-term strategies. Long-term strategies persisted during the dot com bubble, financial crisis, and COVID crash.
- Diversifying portfolios across asset classes, sectors, and geographies to reduce concentrated risks. What you haven’t heard on the news is that the developed (European) markets are performing extremely well. Many developed market indices are up 7-9% through market closing on March 10th.
- Strategic rebalancing as needed or when opportunities present themselves to maintain your target asset allocation without making sweeping changes that could derail your plan. As the market continues to evolve and change, our team may make some tactical shifts, taking advantage of the market downturn.
However, having patience and discipline to stay the course is easier said than done. We’ve provided several tips & tricks for what you can do during these volatile markets.
- Maintain perspective – Remember your long-term financial goals. If you ever feel concerned, feel free to reach out to our team. We’re here to act as a sounding board and guide.
- Turn off or tune out the news. Avoid the 24-hour news cycle that often amplifies short-term movements.
- Maintain a Healthy Cash/Fixed Income Balance. Having appropriate cash reserves provides peace of mind during volatility. Often, we recommend clients have at least 3-6 months of living expenses in a high-yield savings account. For those of you who are retired, starting your first job, living paycheck-to-paycheck, you may not have 3-6 months of cash in reserve. However, the fixed-income portion of your investments can act as a cash reserve. Paradigm purposely maintains a short-term bond position specifically designed to be available if needs arise. In addition, your entire bond allocation provides the necessary buffer to weather many economic or market storms. In other words, the bond portion of your portfolio allows you to avoid selling your equity positions in a down market.
- Resist the urge to go to cash. Remember, it’s about time in the market, not timing the market. Historically, people who experience the best long-term investment return stay the course or invest more during the down markets.
And finally, please reach out with any questions or concerns – That’s what we’re here for!