Volatility returned to the markets over the last few weeks. The S&P 500 index is down 4.82% from September 20 to October 20, 2018. It’s not all thorns though. We’re up 3.52% YTD even with the recent losses. Given all that we hear about the strength of the economy, you may wonder why the market has fallen. Clearly, the value of these companies isn’t changing 3% on a daily basis.
In the short run, markets are irrational. Daily market volatility is pretty good evidence of that. Even still, you may be asking yourself, “What should I do with my investments?” My response, with a properly diversified portfolio that is aligned with your goals and time horizon, why do anything?
I suspect there’s this part of you that can’t help but think – surely, we should be doing something. Here’s the boring, flat, honest truth: a few (huge) down days is probably not going to change a thing for a diversified investor. Maybe your portfolio went from 68% stocks to 62% stocks in the last few weeks, and your investment policy was 65% stocks. So, you get to do: nothing. You weren’t too overweight at 68% to justify rebalancing out of stocks, and you aren’t too underweight at 62% to justify rebalancing in to stocks.
I get it. The market has dropped an appreciable amount and you feel like you need to take some sort of action. But sometimes the best reaction is no action. Just stick to the plan laid out in your Investment Policy Statement. After all, you don’t want a short-term volatility boat to rock your long-term cruise liner.
The long and short of it is stay true to your long-term plan and don’t be distracted by short-term market volatility.
“Don’t you see what’s happening? Potter isn’t selling. Potter’s buying! And why? Because we’re panicking and he’s not. That’s why. He’s picking up some bargains.” George Bailey in It’s a Wonderful Life (1946)
P.S. If you have extra funds for a long-term investment, give me a call. There are always bargains to be found.