Driving to a warm inviting lodge at the top of a mountain, we have only the beams of our headlights to guide us on a dark and moonless night. We are the only ones on the road. Although it feels quite isolated, we at least have GPS to show us that the road definitely takes us to our mountain top destination. For most of the journey we are traveling up, but occasionally the road flattens or even declines in elevation before rising again. We’ve driven this route before and from past experiences we know this road has several switchbacks where we decline in elevation, but we don’t remember exactly when they occur or how far we travel down before heading back up. Our journey is like the path of the stock market. We know from experience that the market continues to move higher over time and that it will periodically decline before turning upward again. The unsettling part is that we don’t know when these declines will occur or how long they will last. Most of us can remain calm and confident in our car ride up the mountain, especially if we are traveling with someone who has been there before. It is more difficult to remain calm and confident in our stock market journey. Why is that?
Low confidence in the market making new highs
We may not be confident that when the decline is over that the stock market will continue appreciating to a new higher value. History demonstrates that through every decline the major measures of stock markets around the world, like the S&P 500 or the MSCI All Country World Index have continued to make new highs. Although we don’t have a GPS for the market, humanity continues to improve its condition generation after generation. Globally, businesses and economies continue to follow the same path of upward. They may falter now and then, but they continue to grow. There may be a doomsday scenario where global growth stops, but I would not be willing to bet against the human race. In my opinion, they are a very resilient and adaptive species even if they do doubt themselves a little too much.
Market headlights aren’t bright enough
Global stock markets are forward-looking. They try to forecast where the economy is going and how it will impact future stock prices. Forecasting is a difficult business and we can only see to the edge of our headlight beams. What is immediately in front of the headlight is clear; the further out we go the more difficult it is to see.
Currently, directly in front of the light is an economy that is still growing, with GDP estimated to grow at about 3% in 2018. Farther out, at the very edge of the light, there is an indication of some slowing. The details are not clear, and prediction is difficult. Our best estimate is that the economy is flattening, not declining. Stock markets tend to overreact because it’s scary not being able to see past the light.
Many pundits try to predict what is beyond the light, yet the fact is that no one can know for sure. What we do know is that the road will take us higher and that there will be periods of decline. The timing and depth of decline are just unknowable.
Confidence in the person riding shotgun
Every trip in the stock market is up an uncharted mountain. Fortunately, stock market paths — while all different — are actually very similar. Just like each mountain is unique, the topography of mountains maintains similar characteristics. A good advisor has studied the history of the market so that she knows what to expect. She has taken investors through bear markets before. Starting in 1950, the average bear market (defined as a decline of 20% or more for the S&P 500 index) has lasted 14 months and the average decline was 34%.
We have started a decline – what is RegentAtlantic doing?
- Following our long-term discipline and remaining calm. Remember, our goal is to get to the warm, inviting lodge at the top of the mountain. We have anticipated declines and have prepared for them in our financial plans. Changing course in the night on a mountain is risky; we’ll stay the course.
- Rebalancing the portfolios. Declines give us an opportunity to rebalance the portfolio — buying more of those asset classes that are underweight is a disciplined way to buy low and sell high.
- Looking for investing opportunities. Stock market volatility may bring opportunities. We are currently increasing our allocation to US Small Stocks. We see them as better values with strong earnings growth.
- Managing for taxes. Volatility creates opportunities for tax loss harvesting, therefore reducing taxes.
- Exploring planning opportunities. Depressed values or volatility may create planning opportunities, like Roth IRA conversions, or make family gifting more attractive.
Stock market declines are unsettling, especially for those in or close to retirement. RegentAtlantic has been riding shotgun for our clients since 1982. Through five bear markets and four recessions we are here for you when the road gets bumpy. Please contact your Wealth Advisor or me with any questions or concerns.
Additional Important Disclosure Information
S&P 500 – The S&P 500 Index is an index consisting of 500 stocks chosen for market size, liquidity, and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large-cap universe. Each constituent in an index is weighted by its market capitalization, as determined by multiplying its price by the number of shares outstanding after float adjustment.
MSCI ACWI – All Country World Index – The MSCI ACWI is a market capitalization weighted index designed to provide a broad measure of equity-market performance throughout the world. The MSCI ACWI is maintained by Morgan Stanley Capital International (MSCI), and is comprised of stocks from both developed and emerging markets.
Important disclosure information
Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.
Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.
This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.
RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.