By: William J. Hufnell, CFP®, CPA / Bay Point Wealth Management
With the recent market activity, we wanted to send this update to give our perspective, and to let you know what action we are taking.
We have had a relatively sustained period of lower volatility over the past few years, which can cause us to forget that selloffs, corrections, and even bear markets are events that happened commonly in all markets, particularly with equities.
The recent market “correction,” with most major world stock indices (such as the S&P 500) slumping by at least 10% in value, is actually very common and tends to happen about once a year.
While markets tend to go up in value gradually year-over-year, market corrections tend to happen more rapidly, and also tend to garner much more attention (and, as we have mentioned in previous newsletters, provides an excellent opportunity for newspapers and television news to sensationalize). In fact, we took the title of this newsletter from this past Sunday evening CNBC television special (at 7:00 PM!) – “Market Turmoil.”
It’s impossible to pinpoint what exactly causes investors to sell, but broadly speaking, the main reasons for the recent drop in market values has been caused by:
- Worries about China's growth rate and the devaluation of their currency
- Weakness in commodity prices, particularly the price of oil (which is now down about 60% from its last high)
- Concern about the Federal Reserve raising interest rates
- Concern about emerging markets – and the impact of China’s growth slowing and the impact to the economies from falling commodity prices
- The recent skirmish between North Korea and South Korea
While we clearly don’t mean to be cavalier about these events, as they are each very important, there has always been, and likely always will be, various economic and political events that will cause concern and change valuations in the market. Just last year there were concerns over the Ebola virus spreading and possibly becoming a pandemic and Geopolitical concerns related to ISIS and the Ukraine. I believe most of us, as we think back, can think of other major events that caused us each to be concerned and also caused declines in security prices.
These pullbacks, corrections and even “Bear” Markets are something that we endure as long term participants in the various security markets.
As always, our approach is not to let the short-term market swings affect our investment approach. We believe that maintaining our longer-term focus and related investment allocation is clearly the best strategy. We also believe fundamentally that owning equities will continue to provide very good long-term growth potential.
As prices drop, this gives us the opportunity to purchase securities that we would like to own at lower prices - and also to rebalance our portfolios to take advantage of these lower valuations.
One quote that I like to refer to is from Warren Buffet of Berkshire Hathaway, “Be fearful when others are greedy and greedy only when others are fearful.” This quote is about human psychology. Market participants tend to overreact to bad news and to unnecessarily react due to short-term underperformance or a steep (and usually temporary) market decline.
We remain confident in our investment philosophy and asset allocation strategy. As mentioned above, we will be taking advantage of some of the recent price changes and thus you will likely see some trade confirmations reflecting our adjustments to your portfolio.
As always, please feel free to call me if you would like to discuss your portfolio or if you have any questions.