Know and Don’t Know

Know and Don’t Know

Published On: April 10, 2018

Written by: Ben Atwater and Matt Malick

In an interview last week, the almost 89-year-old investment legend and Vanguard founder, Jack Bogle, said this is the most volatile stock market he’s ever seen. Although statistics don’t bear this out, it’s an intuition worth noting.

The market of 2018 is certainly a far cry from the market of 2017.  So far this year, the Standard and Poor’s 500 Index has risen or fallen 2% nine times – compared to zero times last year.

Stock market volatility – major up and down swings in price – is a necessary evil.   Investors couldn’t earn solid returns in stocks without volatility. As an equity investor you are effectively compensated for the willingness and ability to stay the course during difficult times. If you wanted an investment with little volatility you’d invest in a 90-day Treasury Bill and receive a commensurate return.

When thinking about stocks, remember, paradoxically, wild price movements result in higher returns. We should embrace volatility.  Vanguard studies estimate that simply staying the course and sticking to an investment discipline adds 1.5% per year to an investor’s long-term performance.

The stock market is in a correction, or worse, and it will be until it retakes its January 26, 2018 all-time high. This could happen next week or in three years, we don’t know.  The median S&P correction lasts 153 days and falls 14.8%.  This is the fifth correction of the current bull market (since the March 2009 market bottom).  The average bear market lasts for 1 year and five months and falls 41%.

But here is what we know . . .

We know . . . our clients don’t have short-term money allocated to equities. Quite the contrary, our client equity allocations have time horizons from three years to more than fifty years.

We know . . . for more than a year we’ve been writing about and discussing with clients the risk of high stock market valuations (beginning with Dow 40,000, (March 22, 2017) and, where it made sense, we’ve reduced risk over this time period.

We know . . . even though things could get much worse, including this pullback ultimately becoming a bear market, it’s not wise to sell equities in a correction or in a bear market. If a client needs cash, part of our correction protocol is to distribute money from accumulated interest, dividends and / or from maturing fixed income positions, when possible.

We know . . . bull markets don’t last forever and we are in the second longest bull market in modern times. Even if this correction is just a correction, there will more than likely be a bear market in the next few years. Mental preparation for a bad market will prove helpful.

We know . . . our dividend-paying and more value-oriented stocks have been out of favor in a high-flying market (like January of this year), but we know that market leadership changes over long cycles. Right now, we find comfort in stocks that pay a dividend and have a quantifiable intrinsic value.

We know . . . in a poor market we can only hurt ourselves by making decisions based on fear, emotion or confirmation bias.

We know . . . trusting a disciplined investment process is the only way to defend against inflation and achieve long-term goals. Even in the midst of a correction, or worse, investing is a necessary evil.

For markets, it could be a pleasant summer or a very unpleasant one, no one knows. Regardless, we’ll focus on what we know and stick to our investment discipline.

Please visit for full disclosure materials related to recommendations contained in this update.

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