The first quarter of 2016 must have been inspired by March, roaring in like a lion and going out like a lamb. The year started off terribly with an immediate market correction of 10.3% for the S&P 500. About halfway through the quarter, the market turned around and appropriately turned green for St. Patrick’s Day. For all that movement (down 10% then up 12%), the market was only up 1.35%. An investor who only checked their portfolio at the end of the quarter could be forgiven for not thinking anything much had happened at all.
We often caution against knee-jerk reaction to headlines and short-term market movements. Market timing satisfies a short-term urge to exert control over something uncontrollable, but it results in less control over the investor’s long-term financial well-being. We prefer indexing to stock picking. Our allocation remains largely unchanged over time as we are not likely to be swayed by the narrative put forward by fund companies eager to sell exposure to a hot new asset class. We focus on an investment’s reliability in tracking its asset class, expenses, and risk exposure rather than how often a money manager is interviewed on CNBC.
So is there anything left to do after setting up a portfolio? The first quarter of 2016 shows that Fairway does not advocate a ‘do-nothing’ (or Ron Popeil “set it and forget it”) approach. This has been a busy quarter for Fairway clients as we’ve been rebalancing portfolios and harvesting losses to offset future capital gains. While a do-nothing attitude would not have hurt an investor, harnessing the market’s volatility allows our clients to ride out “flat” markets not only with their wealth intact, but capturing valuable tax benefits along the way. The volatility also gives our clients the opportunity to buy low and sell high as they rebalance to their target asset allocations.
Market corrections never feel good. This may be more due to the uncertainty surrounding drawdowns rather than the actual market drops themselves. A recent study by University College London measured the stress levels of the study’s participants based on their likelihood of receiving an electric shock. Participants who were shocked 50% of the time had the highest stress while subjects who were shocked 0% and 100% of the time had the lowest stress. Yes, those who were shocked 100% of the time had lower stress than those who were shocked 50% of the time. The uncertainty of the negative outcome was more stressful than the outcome itself. Once investors wrap their minds around the idea that the markets will go down, often by 10% or more (remember, there is a drawdown of 14% for the S&P 500 on average EVERY YEAR), tolerating those swings becomes less about riding out the downturn and more about taking advantage of opportunities.