Market "Coaching Points"Submitted by InFocus Financial Advisors, Inc. on October 15th, 2014
Is the recent market volatility making you wonder about your investment values?
With so many strong economic fundamentals, we don't think there is cause for alarm. At this point in the business cycle interest rates will soon have to begin to rise and that can only cause increased volatility in the market prices.
Here are some coaching points to consider:
1) The numbers are bigger now: 10 years ago when the market moved up or down 1% it meant the DJIA moved only 100 points. That was a normal day in the markets then. Today that same move is 170 points. It may look more volatile but the percentage moves are about the same. This also means we'll have up or down 230 point days on occasion. This is not outside the norm for the markets. Wednesday's dip of more than 250 points was rare, but typical. The relative numbers are just bigger. The percentage moves are very close to the same. We need to get used to these "bigger number" swings, when the percentages are historically typical. It's not easy I admit.
2) We could be "due" a continued correction. We have not had a large market correction since 2011 of more than 10%. According to our research, going this long without a greater than 10% correction has only happened four times before. So the existing rally period is getting "old". The average annual correction, per JP Morgan, is 14% per year. At just a 10% drop from the peak, that would mean we could be down maybe 1700 points on the Dow Jones Industrial Average, and that would still be a typical correction. Rough numbers, we could see the DJIA at 15,300 this year, and we are still far above that point. Even after Wednesday's drop.
3) Plan Ahead: As always, you really need to have any dollars that you might need out of your investments over the next three years in more stable investments. As an example, and hypothetically speaking, if the stock market is down 20% and the monies you need over the next three years are in safer investments, the market volatility make not affect you. Be sure to plan ahead and let us know if your needs and objectives have changed. We ask this three year question in every financial review we do. Make sure your goals are covered for at least the coming three years.
4) Take Tax Advantage: A correction is a great time to tax manage your taxable accounts (non-retirement, not IRA etc). If we get a 10% correction or more, and if you have taxable accounts, you may want to schedule an additional review to see if there are changes you can make in your accounts to lessen your tax burden.
Outlook: Expect more volatility. It seems, however, with the good economic fundamentals that currently exist, we may very well have a good overall three-year performance in our accounts going forward. While we never seem to enjoy the path the markets take, it seems there is more upside over the coming years than down. There will be significant corrections that come up, sometimes each and every year. As interest rates rise, the markets will be more volatile, almost certainly. Volatility, of course, does not equal "negative" performance, but certainly a bumpier ride in the process. The current business environment lends me to believe we could "come out the other side" of three years with some solid returns on our account statements. Lastly, it is frequently not a good idea to underestimate the power of the American corporation in navigating this type of environment while there are good economic fundamentals. Over time, corporations have found ways to grow their profits, and their stock prices historically follow suit.
If you have any additional questions or your needs or objectives have changed, be sure to schedule a call or meeting. We would love to be of assistance. And of course, watch your emails. If the volatility increases we will certainly offer more communications as things change as we've done in the past.
Investors cannot directly invest in indices. Past performance does not guarantee future results.