Patience & diversification matter in all manner of stock market climates.
Stocks rise, fall … and rise again. Volatility certainly came back to Wall Street during the first several weeks of 2014 in the form of a 7.2% descent for the Dow Jones Industrial Average and a 5.9% retreat for the NASDAQ. The declines gave investors pause: was a correction underway? Would bulls be held back for 2014?1
As it turned out, no. On February 27, the S&P 500 settled at a new all-time peak of 1,854.30, with dovish remarks from Federal Reserve chair Janet Yellen providing lift. On the same market day, the DJIA closed at 16,272.71 and the NASDAQ at 4,318.93.2
Ups and downs are givens when you invest in equities. Still, the skid stocks took in 2008-09 has made everyone from millennials to members of the Greatest Generation anxious about any string of down days for the big indices. If the benchmarks lose a couple of percentage points in a week, or more in a month, headlines and news alerts emerge and encourage collective fears of a stock bubble.
Be patient; be prepared. We don’t really know what will happen tomorrow, and therefore we don’t really know what will happen on Wall Street tomorrow (though we can make educated guesses in both respects). Because of that, it is wise to diversify your portfolio across different asset classes and rebalance it from time to time.
Would you rather have a portfolio that might perform at least decently in varied stock market climates, or a mix of investments that only makes sense in a bull run? We recognize that diversification is wise, especially for the long run … and yet, when things go really well or really poorly on the Street, impatience and anxiety readily lure us away from the age-old wisdom.
The S&P 500 rose 29.6% in 2013, 31.9% with dividends included. Rationally, investors realize that such phenomenal stock gains won’t happen every year. Even so, the temptation to go full-bore into U.S. stocks and stock funds was pretty strong at the end of 2013 … comparable to the call to invest in gold or bear-market funds back in 2008-09.4
If an investor relied on impulse rather than diversification across these past few years, he or she might be poorer and/or awfully frustrated today. Gold is in a bear market now, and according to Morningstar, the average bear market fund has lost 33% annually since 2008. Stocks are firmly in a bull market now, but an investor hypothetically going “all in” on domestic stocks at the end of 2013 (i.e., buying high) would have faced a market decline early in 2014 and might have impatiently sold their shares.3
Dynamic asset allocation is a strategy best left to professionals, even teams of them. Most retail investors would be hard pressed to even attempt it, even at a basic level. This is why diversification is so often suggested to those saving for retirement and other long-term objectives.
Hang on when turbulence affects the markets. Staying in the market can prove the right move even when the news seems cataclysmic – look at how stocks have rebounded, and hit new highs, since the precipitous fall the S&P took in the recession. Sticking with principles of diversification can prove wise in both challenging and record-setting markets.
Citations.
1 – marketwatch.com/story/the-markets-in-for-a-wild-but-clearly-bullish-ride-2014-02-27 [2/27/14]
2 – thestreet.com/story/marketstory.html [2/27/14]
3 – marketwatch.com/story/dont-try-to-time-the-market-2014-02-21 [2/21/14]
4 – tinyurl.com/k9ul3af [12/31/13]
This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index. NYSE Group, Inc. (NYSE:NYX) operates two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange). NYSE Group is a leading provider of securities listing, trading and market data products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the world’s largest physical commodity futures exchange and the preeminent trading forum for energy and precious metals, with trading conducted through two divisions – the NYMEX Division, home to the energy, platinum, and palladium markets, and the COMEX Division, on which all other metals trade. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability and differences in accounting standards. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. All economic and performance data is historical and not indicative of future results. Market indices discussed are unmanaged. Investors cannot invest in unmanaged indices. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This material was prepared by MarketingLibrary.Net Inc., for Mark Lund, The 401k Advisor, Investor Coach and author of The Effective Investor. Mark offers investment advisory services through Stonecreek Wealth Advisors, Inc. an independent, fee-only, Registered Investment Advisor firm providing 401k consulting for small businesses and private investment management services for select individuals. Stonecreek is located in Salt Lake City, Murray, West Jordan, Sandy, Draper, South Jordan, Provo, Orem, Lehi, Highland, Alpine, American Fork all in Utah.
