Yesterday gave us another unfriendly reminder that stocks can be volatile. Investors continue to focus on the US-China trade war, which escalated even further on Monday. As a result, the S&P 500 lost about 3% of its value. That’s the largest one-day point drop since December of last year.
SELL! SELL! SELL? Hopefully not. History has proven that most investors who sell and “wait for things to get better” end up hurting themselves more than helping. Here’s a graphic from JP Morgan and CNBC illustrating what happens if you invested $10,000 from 1999 – 2018 and either stayed fully invested or left the market for a period of time.
The second ouch, while not as painful, was that treasury bond yields also went down. The Fed Rate cuts (and the expectation of more cuts) as well as slower growth prospects are likely to blame. As recently as September of last year, the 10-year treasury yield was at 3% and now sits at 1.84%. The good news here is that if you already owned bonds, you saw their values rise since the market is now willing to pay more for your older, higher yielding bonds.
So, what’s an investor to do? I am going to use the tried and true answers from Schwab Investment Research:
“It’s generally healthier for your portfolio if you resist the urge to sell based solely on recent market movements. You can’t control what the market does, but there are things that you can control. Here are some things you might consider doing now:
Revisit your risk tolerance. Volatility is often a wake-up call for investors who haven’t been engaged in their portfolios. If you’re not comfortable with your risk level, it may be prudent to dial back the overall risk in your portfolio, but keep in mind that it’s important to take into account both short- and long-term goals.
Make sure your portfolio is appropriately diversified. A diversified portfolio tends to be better positioned to weather market swings and provide a more stable set of returns over time. Because a diversified portfolio is invested in many asset classes, it can benefit from owning top performers without bearing the full effect of owning the worst performers.
Rebalance your portfolio regularly. This is especially important now given the big swings we’ve seen starting in the fourth quarter of last year. Market changes can skew your allocation from its original target. Over time, assets that have gained in value will account for more of your portfolio, while those that have declined will account for less. Rebalancing means selling positions that have become overweight in relation to the rest of your portfolio, and moving the proceeds to positions that have become underweight. It’s a good idea to do this at regular intervals.”
Not to be outdone by the S&P 500, my son Coleman experienced the pain of a “double ouch” while at the beach earlier this Summer. We were at a local putt-putt course, and the bird obstacle on hole 5 was particularly hard for him to avoid. Mind you, he avoided it with his golf ball, but he managed to bang his head on the bird beak not once, but TWICE! (insert Dad bad genes joke here) But, much like investors should do during market downturns, he did not quit and powered through the rest of the round!