Posted by Gary Abely, CFP®, AIF®, CPA
“Volatility is not risk, it is the source of future returns.” – Jan. 10, 2016
“Volatility” can be measured by using the standard deviation or variance between returns from a market index over a certain time frame. While volatility is not exactly risk, it can provide an indication of an asset’s risk. In this case, the author of this quote clearly wanted the reader to understand that to obtain long term favorable returns, one must accept the inevitable volatility that comes from investing in equity securities. Undoubtedly, 2017 and future years will have plenty of intra-year moves up and down ten to twenty percent or more.
“It’s always something.” – Apr. 1, 2016
A client asked me why I preferred mutual funds and exchange traded funds in her account over individual stocks. I explained that large multi-national companies are always in the news for one thing or another. Seemingly, half the time one (“I”) might look like a genius for recommending a security and the other half a part-time novice. Short-term, the price movements of individual securities often make no sense, yet there will always be pundits that try to explain movements through corporate news items making investors question their initial purchase. In 2017, whether it is terrorism, Russian aggression, Fed policy, North Korean test launches, strong dollar, etc. we will have no shortage of events to point a finger at when trying to explain short term equity movements. A better solution in 2017: Forget about trying to rationalize short-term movements and focus instead on a long-term investment strategy. A possible side effect may be better sleep in 2017 because, yes, there will always be something.
“The best investment decisions are ‘uncomfortable.’” – Jun. 10, 2016
Perhaps this quote should be the definition of rebalancing – selling your winners and purchasing your losing investment positions to maintain a certain investment allocation. Rebalancing may feel uncomfortable, but it accomplishes two important things: 1) It forces you to sell securities that have risen in value more than your other investments and 2) maintains your investment allocation at an appropriate risk level. This quote also reminds me of Warren Buffett’s advice: “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” Purchasing what others are selling can be quite uncomfortable but rewarding in the long term. No doubt in 2017 it will also be necessary to make “uncomfortable” trades in investment accounts to lock in profits and maintain a consistent asset allocation.
“Nobody ever said it had to make sense.” – Aug. 2, 2016
Articles were written in The Wall Street Journal and Barron’s prior to this past Presidential election warning of a market selloff in the event President-elect Donald Trump were to surprise with victory. It is important to remember that the market does not have to make sense to be correct. Stated differently by a leveraged investor, “The market can remain irrational much longer than I can remain solvent.” Looking for sense in the short-term market movements can only lead to frustration. This thought is a great segue into the last famous quote of 2016. By the way, don’t expect the short-term movements in equity prices to make sense in 2017 anymore than they did in 2016.
“Sometimes the market interprets everything positively, and sometimes it interprets everything negatively.” – Nov. 11, 2016
The phrase “climbing a wall of worry” comes to mind when I first read this quote. The idea that despite all the bad news known the market keeps advancing, ignoring so-called sell signals. Some attribute this sentiment to herd mentality and momentum investing. In 2017, there will be plenty of times one scratches their head trying to explain short-term equity movements. It may even seem that investors are only focused on positive or negative news items for a period. At this point, it might be wise to remember Mr. Buffett’s advice: “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
2017 is certain to bring many news items that will scare some investors away from their long-term investment plans. Volatility is something which occurs on both sides of the equation. Markets can be volatile both on the up and down side. Thinking of volatility as simply variable may help calm the nerves a bit. The stock market varies in price and sometimes this variability is without logical explanation. Some 2017 news items may even call into question your chosen risk tolerance. After all, you completed a risk assessment questionnaire before you knew of the new news item A or B which will occur in 2017. Remember there has always been and there will always be news items and some of your best investment decisions will not necessarily be the most comfortable ones you make. Finally, don’t expect short-term directional movements of the stock market to make sense and don’t waste time trying to identify possible causes, or worst yet, trying to time them. The most successful investors adhere to a disciplined long-term strategy without trying to time the short-term, often irrational, stock market movements.
Happy New Year!