Commentary
Friday Evening, August 21, 2015 
 
How Bad Market News Can Be Good News For You
 
Dear Clients and Friends,
 
One of the key responsibilities of a good financial advisor is to help people put market news in its proper perspective, especially when the media is reporting global market declines like we've seen during the past few days. And, because the markets have been so flat for so long, it can be easy to forget that this type of volatility is as common as dirt.
  
So, just a few facts to put things in perspective:
 
  • The S&P 500 has experienced average intra-year declines of 14.2% going back to 1980. Yet, despite those declines, annual returns were still positive in 27 out of the past 35 years.  The S&P 500 began this 35 year period at a level of 105 and it closed today at a level of 1971.  That's a fairly significant increase considering all the interim "ends of the world" which turned out not to be the "end of the world". 
  • Friday's decline was 500 points in the DJIA, which was 3.1%. During this bull market there have been 11 similar daily declines of that size (or larger), and in every instance the market went on to new highs. So today's decline, by itself, does not mean we're in a bear market.   
  • This week's decline in the S&P 500 Index was 5.7%. Since 1940 there have been 38 weekly declines of this size (or larger). Surprisingly, there were 3 times as many double-digit gains three months later than there were double-digit losses. So this week's decline doesn't necessarily indicate more big losses ahead.   
  • For perspective... from the market peak earlier this year, the DJIA is off 10.1% through today's close, and the S&P 500 Index is off only 7.5%. So far, this barely qualifies as a correction. And the last 10% correction was in 2011, so this was overdue.

To be sure, things may get worse before they get better.  Nobody can predict short term market movements.  Yet, the historical record is clear:  the declines are temporary, the advance is permanent. 
 
If, on the other hand, you are wondering whether you should adjust your investments in light of current events, we'd like to offer some context on why withstanding today's bad market news can actually translate into good news for you and your investments, at least in the long run.
 
Remember those conversations we've had about your willingness, ability and need to tolerate market risks in pursuit of expected rewards? This week's market performance serves as an excellent Exhibit A on just what that risk feels like when it happens. It hurts, it can be scary and it's not any fun at all. But if these sorts of realized risks never occurred, sometimes severely, the market could not be expected to deliver long-term premium returns to those who are willing to ride out the pain.
 
It might help to think of investing in the markets as being like going to the dentist. It's unlikely you enjoy getting your teeth cleaned, having a cavity filled or undergoing a root canal. But these unpleasant experiences are necessary to preserve if not improve on your winning smile. Just as your dentist offers pain mitigation strategies as appropriate, diversification is our prescribed pain-killing medicine to help lessen, if not eliminate the hurt when it occurs.
 
Big-picture strategy aside, we understand that you may still have questions about the unfolding news that is grabbing current headlines: China's devalued currency, the Fed's plans on U.S. interest rates, declining oil prices, ongoing uncertainty in Greece, and so on.
 
While we don't let breaking financial and economic news overly influence our long-term advice, we do find the information fascinating. It also continues to contribute to our ongoing understanding of how markets operate over time. If we can share our insights on these or other questions you may have about what makes the markets tick the way they do, we would be happy to hold that conversation with you any time.
 
As always, we are just a phone call or email away.  We're here to help. 

Thanks for taking a look!

  





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