The volatility of the global financial markets over the past few weeks was an important test of your ability as a long term investor.
It was a gut check for many, as there has not been a sharp decline like this for a long time.
How did you do? How did you handle it?
Did you react calmly or with great concern?
We hope that you remained calm. Among our clients, we did not sense significant feelings of panic or desires to make major portfolio changes.
That is encouraging to us, as we strive to provide you with education (like these blog posts) so you will be prepared for temporary market declines.
A few of you called with questions, which is what we want you to do, if you had any questions or concerns.
In early February, global stock markets declined over 10% and interest rates have risen a bit.
However, since the intra-day low on February 9th, U.S. and International stock markets have recouped some of their losses from the January peak. Many asset classes are slightly positive for the year, as of February 15th, 2018.
These are some of our key takeaways from these recent events and our thoughts on the future:
- The US and global economies remain strong. Earning reports continue to be very solid. There are no signs of a recession or major economic collapse.
- This type of pullback or correction was long overdue.
- Interest rates and inflation are increasing, which we view as positive. This is a sign of a strengthening economy. Interest rates will likely continue to rise, gradually, over the next year or more.
- As interest rates rise, this may cause occasional choppiness in the stock market. You should think of this as turbulence that an airplane experiences as it flies through a storm. The plane will make it through, but the ride is a bit bumpier. At the end of the flight, you have safely landed.
- As long as interest rates and inflation do not increase too quickly or go too high, we do not view this as a problem.
- The 10 year US Treasury Note is yielding around 2.9%, which is still historically very low.
- Mortgage rates are around 4-4.5%, depending on the length and amount of the mortgage. Again, this is historically very low and should not dampen the housing market. For example, my first mortgage in 1990 was at 10%. Current mortgage rates are still a bargain compared to that.
- Even if interest rates increase 1/2%-1% over the next year, we don’t think people will stop buying cars, trucks, technology and houses. Companies will not discontinue investing in their businesses.
Remember, risk and returns are related. To receive the long term benefit of greater expected stock market returns, you need to endure some down periods of holding stocks.
We invest and structure your portfolio for the long term. That should be your focus.
I made this baseball analogy with a client last week. We invest successfully by enabling you to hit singles and doubles so you can stay in the game for a long time. Those who swing for home runs tend to strike out much more frequently. Those who look for quick, big gains in the stock market also tend to incur more significant losses over the long term.
Like a successful hitter with a good, solid batting average, we want you to be patient, disciplined and confident regarding your investments.