The Markets Stink. Now what?
2018 was a pretty good year for stock market returns…. Until October. Since then we have been hit with very difficult performance. A couple of weeks ago, the US markets had regained enough ground to at least have a zero percent return. At the moment, though, returns are negative for the year. Our brains, specifically our limbic system, where all of our emotions operate, want to do something! That is the part of the brain that would compel us to run so a tiger would not eat us back in more primitive times. The limbic system is not necessarily our friend when it comes to investing, because we need thought out actions, not reactions.
So, what should we do? In an odd way, we are fortunate that the market downturn is taking place at the end of the year. Although it makes year end performance reporting painful, we have an opportunity that is not present the rest of the year. Right at the end of the year mutual funds pay the majority of their dividends and capital gains distributions. So, our portfolios will receive some cash over the next week or so. We have been anxiously awaiting for this to happen, because our action, versus reaction, is to take that cash and purchase the mutual funds that have the worst performance this year. Why is this a good idea? Because markets move in cycles, and what has recently tended to be the worst performing markets (US vs International, Small Companies vs. Large, etc), tend to have better performance in the future. This is what my mother, the consummate bargain shopper would call, “getting a good deal because they are on sale!!” To further the shopper analogy, with sweaters half off, we can afford to buy two!
For our clients who are still actively investing regularly, that is exactly what has been happening over the past couple of months. Your regular contributions are buying more shares of each investment you purchase, and will benefit from the market recovery that is sure to come. Conversely, for our clients who will be required to take minimum distributions from their IRAs next year and do not need to spend the distribution, the muted account value at year end will allow for lower minimum distributions, and thus lower required taxes paid.
But with trade wars looming, the Federal Reserve poised to raise rates, and a potential government shut down on the horizon, are we headed for a crisis? It is possible, but I would like for you to bear in mind what has historically happened to stock price performance after every real crisis has occurred. There has not been one time, including the financial crisis of 2008, where the markets had not recovered within three years. For all but two instances, the markets had actually recovered within one year. If the investment tiger had scared us away, we would have missed some great subsequent returns. The chart below shows 1, 3 and 5 year returns following every major crisis in the US since 1987.
As always, I am here if you want to talk about this. And I want to talk to you if you are feeling uneasy!