Here it is, Friday, March 11, 2016: The DOW is up over 200 points and the European markets are up twice as much. My mind quickly goes back just 30 days to Friday, February 11 when the DOW closed down over 250 points at 15,660, which turned out to be the low point of a dismal start for 2016. Only 1 ½ months in to 2016, many investors found their accounts down 10% in 2016 on the back of lousy 2015. At that time, fear and frustration was palpable. On February 11, trying to encourage clients, we wrote the following:
Another 200+ point day down in the market while I sit idly by and watch my hard-earned savings dwindle in value. All the while, I am getting closer to retirement every day. This feels like a fool’s game. What in the world should I do?
- LOOK AT HISTORY. Market corrections of 15% to 20% happen about every 3 to 5 years (at this writing, the Dow Jones Industrial Average is down approximately 10% in 2016). Nobody…we repeat…Nobody knows when they will start and when they will end. In spite of these relatively frequent corrections, since 1926 a 60% stock and 40% bond portfolio has produced and average return of 8.7%*. More recently, even measuring from the year 2000 before the Dot Com bust, a balanced portfolio invested in a variety of asset classes has produced an annualized return of 4.8% from 2000 through 2015**. During that 16 year period, stocks declined in value 25% of the time and the average decline in those negative years was significant, down approximately 20%.
- BUY! How, you ask? If you are like most investors, you are fully invested except for some cash you have for emergencies. So buy with what?? Simple…just rebalance. For example, if you are trying to maintain a 60% stock and 40% bond allocation, your portfolio after this correction probably looks more like 55% stocks and 45% bonds. So sell some bonds and buy some stocks.
Since we wrote this, just 30 days ago, the DOW has risen almost 10% (to 17,213) and Europe is up almost 17%. Most of the early 2016 portfolio losses that were causing investors such angst are now gone! So what is the take away from the last 30 days? We have once again been reminded of the importance of not allowing our emotions to take control of our investment strategy. It is so easy to get caught up in the financial despair of 2-11-2016 and the euphoria of 3-11-2016. Stay level headed and committed to your investment plan. Don’t pay attention to short term moves. Maintain the appropriate allocation based on your age, risk-tolerance, and financial goals.
**The portfolio assumes the following weights: 25% in the S&P 500, 10% in the Russell 2000, 15% in the MSCI EAFE, 5% in the MSCI EME, 25% in the Barclays Aggregate, 5% in the Barclays 1-3m Treasury, 5% in the Barclays Global High Yield Index, 5% in the Bloomberg Commodity Index and 5% in the NAREIT Equity REIT Index. Balanced portfolio assumes annual rebalancing. All data represents total return for stated period. Past performance is not indicative of future returns. Data are as of 12/31/15. From J P Morgan Asset Management