David Munn, CFP
If you’re reading this, it means you survived the year 2016. Congratulations. Fidel Castro was said to have survived more than 600 assassination attempts, but even he could not accomplish what you and I have done.
Perhaps the stock market was attempting to warn us last January and February that 2016 would be volatile and unpredictable in many ways, but no one could have predicted all that transpired. For their part, US stocks rebounded from what was at one point the worst 10 day start to a calendar year in modern history (Source: MarketWatch), to post moderate gains--taking only a week to digest the surprising Brexit vote--capped off by a furious post-election rally.
Given all that’s happened, I wanted to use this space to address some of the common questions we have been hearing, providing my personal responses:
● Does the market’s recent run mean I should sell stocks? No
● Does the market’s recent run mean I should buy stocks? No
● Does the market’s recent run mean I should get more aggressive? No
● Does the market’s recent run mean I should get more conservative? No
● Does the market’s recent run mean the government is going to make the economy great again? No
Please allow me to explain. We know that stocks go up and down over short-term periods of time. But over long-term periods of time, stocks generally go higher and set new “highs” over and over again. There are fundamental reasons this is mostly true that this space does not allow for.
Sometimes the track of stock growth looks like a rocket blasting into orbit (think stocks during the 1980s and 1990s).
Sometimes the track looks like a roller coaster (think stocks since 2000):
When stocks reach new highs, it is no more an indication they will continue rising than it is they will fall. That’s why you always see that disclosure in our industry, “past performance is not an indicator of future results”.
The market’s response to the election of Donald Trump seems partially based on expectations that his promises of less regulation and lower tax rates for business will lead to higher profits. These expectations could go unmet or they could be exceeded, dependent on an infinite number of variables over the coming months and years.
So how should an investor respond in these circumstances?
First, re-evaluate your risk tolerance assuming a significant market rally or pullback are equally likely over the coming year. While the odds may not be exactly equal, they are both possible, so you should be pro-actively prepared for the possibility of both.
Second, if you plan to add or withdraw money from stocks in 2017, dollar cost averaging is beneficial. Rather than waiting for an opportune time to buy or sell--which may never come--do a little bit every month. It’s a way of hedging risk and likely ensuring you don’t buy or sell at the worst time of the year.
Third, if you have not rebalanced accounts recently, this is a good time. While some parts of the stock market have performed well, other areas--primarily international--have continued to struggle. Consequently, accounts outside our management, such as employer 401(k) plans may have strayed significantly from their original allocation.
We know some investors decided to exit the stock market prior to the election, fearing what a surprise Trump win might do. For about 10 hours on election night, that seemed like a very smart move. But the aftermath just goes to demonstrate how unpredictable, irrational and difficult/impossible to time the stock market can be. Expect more of the same in the future.
Sources:
MarketWatch
Disclosures:
• Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by the adviser), will be profitable or equal to past performance levels.
• This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client. These materials are not intended as any form of substitute for individualized investment advice. The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own. Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors. Munn Wealth Management can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein. 1323DG