Well, that wasn’t fun. Volatility returned to stock investing in January as the S&P 500 slid 5.3%, its worst month since March 2020, the depth of the Covid pandemic. International stocks were also down, though somewhat less. The hardest hit areas were the most speculative ones — cryptocurrencies, tech stocks that don’t make money, and “meme” stocks.
January’s sell-off was in part due to the Fed signaling that it will raise interest rates, most likely starting in March. The reason —inflation is at the highest levels seen in nearly four decades. Though the economy remains strong, it continues to face supply chain disruptions and a shortage of workers. Meanwhile, the omicron variant continues to rage.
So it's not hard to imagine more volatility ahead, with the potential for further downturns in a stock market that was fueled in part by low interest rates.
Many investors are wondering how to respond. After all, we are bombarded with predictions about where the markets are headed. It hits us through cable news, social media, even conversations you strike up with your Uber driver!
Should long-term investors reposition their portfolios based on today’s events? The answer is no. Trying to time when to get in and out based on guesses is a loser’s game. The evidence is quite clear.
Dalbar is a research firm that studies the investment behavior of mutual fund investors. In their 2020 study, based on the 20 years ending 12/31/19, the average equity fund investor significantly underperformed a simple buy and hold index strategy1. The reason? Investors are often their own worst enemies, trying to time when to get in and out, and chasing performance.
There is a better way to achieve your investing goals over the long run. But it involves making a decision that’s often tough for investors: the decision to do nothing, tune out the noise, and simply stick with a disciplined strategy.
We call our disciplined strategy Value Added Indexing®. Portfolios are constructed based on clients' unique circumstances, taking into account time horizon, need for liquidity, and risk tolerance.
We utilize low-cost funds that closely track the markets. Stock portfolios are broadly diversified, holding U.S., International, Emerging Markets, and Real Estate stocks. We don’t make short-term tactical moves, but rebalance when portfolios move away from their target mixes as the markets go up or down. New cash is invested in smaller increments over a period of several months, rather than putting it all in the market right away.
We remind clients that this approach is going to be in place for decades, or perhaps longer. And that's the point—sticking with a proven, effective strategy over a long time period beats constantly trying to guess what will work over the next quarter or so.
We have clients that have been with us since we started the firm 16 years ago. Their results, through plenty of good markets and a few very difficult ones, have been strong. Most importantly, they are on track to meet their goals – not the goals of their Uncle Harry or someone shouting on CNBC.
When we’re asked how we will respond to one of the above-mentioned headlines, we simply say, "we are going to help you make one of the toughest investment decisions you will face."
"Sit tight. Stay disciplined with our strategy. Don't make any changes based on short-term thinking."
A tough decision? It can be. But it's the most effective way to invest for the long-term.
David Rappaport, CFP®