Brief Update on Current Market Volatility

Market Volatility

We want to take a moment to update you on our thoughts related to the coronavirus and its impact on the financial markets, and, ultimately, on your personal financial situation.

Going into this New Year, many stock markets around the world were trading near all-time highs. In the US, for example, the S&P 500 index, a broad measure of the stock market, saw its price increase from under 700 in March 2009 to over 3,300 this month, according to data from Yahoo! Finance. It makes for a good headline, but hitting an all time high is totally normal - in fact, there were 18 all time highs in 2018, 62 in 2017, 18 in 2016, and so forth.

Of course, markets don’t go up forever. Sometimes, they just flatline for a while as company earnings catch up with stock price valuations. Other times, they see violent drops that make big headlines, like the “Black Monday” stock market crash on October 19, 1987 that was felt around the world.

In the past few days, the coronavirus is triggering a steep stock market selloff around the world. As of this writing, most market indexes in the US, Europe, Japan, and Australia are down 10% or more from recent highs, according to The Wall Street Journal.

Top investor Warren Buffett famously wrote, “It's only when the tide goes out that you learn who's been swimming naked.” Well, the tide is going out. The good news is, we prepare for situations like this even though we never know what may trigger them - an impeachment hearing, continental wildfires, or a virus from China.

Focus on What You Can Control

For years, people have been predicting a market correction. Last month, we wrote about what could happen during this kind of correction, and how you should focus on things within your control:

"...at some point in the next 12 months, something unexpected is going to send the markets into a tizzy. A Silicon Valley unicorn is going to have an underwhelming IPO. An earthquake on the other side of the world is going to require a big influx of aid. An election is going to spark two very different reactions from two very different groups of investors. In the short term, the market will go through a correction that sets off a whole new wave of doomsaying.

… but you can stick to your long-term plan.

In the long run, that correction is going to register as another small dip on a line that continues to trend upwards. As you’ve probably heard us say before, market volatility is just a tax that investors have to pay on wealth-building. Sticking to your long-term plan is a much safer and more reliable strategy than trying to “time” your savings and investments based on today’s headlines."

While it may hurt to see "paper" losses, remember that your financial plan has accounted for the likelihood of market crashes. You are already prepared for this with a well-diversified portfolio. This is especially true if you are retired: Most of our retiree portfolios have a built-in cushion of years so that you don't have to worry about the fluctuations of the stock market from week to week, or month to month. We know it's hard to avoid hearing about how the markets are performing, but the truth is that you don't need to worry about the part of investing that is outside of your control.

Three Keys

Here are three keys we’d like you to keep in mind as we work through the unfolding virus situation and its impact on you and your financial situation.

First, fear is a natural reaction. We’re human and as humans, we’re hardwired to react to situations that threaten us. In this situation, we have a double whammy of fear: the physical fear of a virus, and the financial fear of a market crash.

The only thing you can really control is your reaction to this fear. We know it is hard to see your portfolio drop. But we also know market volatility is normal and expected. The key is to zoom out and look at the long-term big picture, without being reactive. Remember that trying to time the market is the biggest cause of loss in a portfolio, much bigger than the normal dips and drops of the market. As long as you can stick to your strategy, you should end up fine.

Your investments are designed to support your long-term objectives, not today’s needs. And just like in farming, where we know there will be some lean years when Mother Nature doesn’t cooperate and other years when there’s a bumper crop, the financial markets are similar. Financial markets react to shocks to the system and we are seeing one now.

In situations like this, our job is to bring perspective, to help you see that swift market drops are not unusual. And yes, the headlines are scary and they can bring our “fear” instincts to the surface. We believe the best response is to:

acknowledge what you’re feeling,
reach out to us if that would be helpful, and
have confidence that we are on top of the situation.

Second, we are closely following the situation so that you don't have to. Sometimes, situations like this create opportunities for you. For example, as prices drop, we may have an opportunity to “rebalance” your portfolio and shift your asset allocation. This means we might be able to “sell one thing and buy another” as a way to get your portfolio back to a desired mix that is most appropriate for you.

Third, be prepared emotionally for more volatility. In today’s financial markets, many trades are triggered automatically by algorithmically driven computers. Once certain levels are reached, these computers, often run by large hedge funds, start selling (or buying) indiscriminately. And many of them are programmed to “trigger” based on the same technical levels. This “piling on” can lead to very eye-popping volatility—both on the downside and upside.

And keep in mind that in the short term, market movements can be heavily influenced by fear and computerized trading, while in the long term, they tend to reflect broader-based economic trends. As investors, the challenge is to not let the difficulties of the short term prevent us from reaping the benefits of sound, long-term investing. We have always known that at some point, market volatility would rear its head. Your financial plan was built to absorb these shocks.

Natural Bridges Financial Advisors

Brief Update on Current Market Volatility

Market Volatility

Focus on What You Can Control

Three Keys

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