Stick to the plan when markets correct – it’s normal
Unabashed growth has been missing in action and has come back with a vengeance. That is a double-edged sword, which is great for businesses and consumers but not so great when it precipitates interest rates storming back – to well…normal. In the last week ending with yesterday’s selloff, the broad market gauge of the S&P 500 was off by over seven percent as the 10-year U.S. Treasury yields suddenly surged with enthusiasm catching the market “off guard.” There will be confusion, but even though there are two sides to a story there is only one side to the facts:
- Liquid equity markets sold off the most, that is, U.S. Large Cap and EAFE International equity were hit the hardest. Worse than even Emerging Markets.
- High quality fixed income had positive returns – we call fixed income the sailboat’s “keel” or ballast in a well-diversified portfolio – long U.S. treasury bonds were up nearly one percent for the day verses negative four percent for equities.
- Markets were priced for the status quo: volatility and bond yields staying low. The volatility index (VIX) surged over 115% to 37.3 yesterday.
- Semiconductors, banks, and biotech have been especially hard hit but were not alone.
Here are some things to keep in mind amid the uncertainty:
- Time, not timing, is key. Predicting the market is not like predicting the weather. There are no high-tech gadgets or radar systems to predict the highs and lows that may lie ahead. Without knowing the exact moment to buy or sell, it is easy to miss the market, which could prove costly.
- Sticking to an investment strategy can keep your returns in line with long-term market performance. However, past performance doesn’t guarantee or predict future returns.
- Diversification is important. It is a risk management technique that mixes a wide variety of investment options within a portfolio. It is designed to help reduce the impact of any one security on overall portfolio performance.
- Consider diversifying your assets through asset allocation. This is the process of dividing a portfolio among major asset categories, such as bonds, stocks, or cash. The purpose of asset allocation is to help reduce risk by diversifying the portfolio.
Monitoring the market during fluctuations and being aware of risk management strategies can help investors choose whether to stay the course as they work toward their retirement objectives.
Douglas Coté, CFA Chief Market Strategist
Karyn Cavanaugh, CFA SVP, Senior Market Strategist
While using diversification and/or asset allocation as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss in declining markets, they are well-recognized risk management strategies. Investments are not guaranteed and are subject to investment risk including the possible loss of principal. The investment return and principal value of the security will fluctuate so that when redeemed, may be worth more or less than the original investment.