Stock investors whipsawed


Ever since the equity markets set an all-time high during the latter part of January investors must feel like they’re on a rollercoaster or one of those old-fashioned scramblers that we would ride at the county fairs when we were young. Just when you are bracing yourself to be slammed in one direction, you have to shift gears and get ready to move sharply in the other.
Several issues have kept the equity markets in check, not the least of which is the fact that the S&P 500 posted a gain of over 20% during 2017, when dividends are included. The stock market needed a breather as this pace was unsustainable. Additional headwinds include rising interest rates, an appreciating dollar, and an ongoing trade war.
It is difficult to believe, but this type of volatility and sideways trading is good for investors over the long haul as it creates anxiety which in turn creates opportunity. Times like this remind us that time tempers volatility.
What’s an investor to do? An investor should do what he/she should always be doing. That is, recognize that bull, bear and sideways moving markets are all a normal part of an investor’s continuum. One must, therefore, continue to commit long-term capital to equities and short-term capital to bonds and cash. We define long-term capital as that which has a six to ten-year time horizon and short-term capital as anything less than that.
Maintain proper asset allocation across the four asset classes (stocks, bonds, cash, real estate) as well as within each of those asset classes. Appropriate asset allocation helps an investor make objective, rational decisions during volatile periods in the market rather than emotional, irrational ones. One also needs to place the current market movement in historical perspective. Market conditions like these are not without precedent.
The above comes with challenges as, during the latter stages of a market cycle, the benefits of diversification and of maintaining a portfolio that is constructed to achieve your long-term objectives become less and less apparent. If that cycle is bullish as it has been over the past nine years investors tend to eschew the benefits of diversification as the longer a trend remains in place, the more firmly investors believe that it is “different this time.” One must only think back to early 2009 when, as the market was bottoming, many were underinvested, looking for even lower lows.
Finally, as harsh as it may sound and regardless of the recent direction of your portfolio, either you have faith in the benefits of investing over the long haul, or you don’t. If you have faith, stay the course. For those that don’t, get out. However, keep in mind that exiting the markets for good also carries opportunity cost, or the loss of the benefits of investing as opposed to positioning your portfolio in cash or equivalents.
If history is any guide, we believe it will be financially beneficial for investors to take a longer-term look at the markets, perhaps longer than the minute-by-minute look that the business stations want you to take. Focus on the data which, at this time, suggests robust economic growth and increasing corporate earnings, both in a relatively benign inflationary environment.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call 518-279-1044.


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