To: Investment Clients of Davidson & Watson Financial
We want to assure you that we are paying very close attention to the stock market and the increased volatility that it has shown in recent months and days. And we would like to reiterate our investment philosophy as well as address the recent market activity.
Days like today are when it is important to remember the core principals of our investment philosophy.
First, we believe that it is vital to choose an investment philosophy and to stick with it for the long-term. Those who invest with a short-term horizon are betting on their ability to “time the markets.” Yet study after study has shown that those who attempt to do this end up getting inferior returns than those who stick with their investments through the ups and downs. This includes even the most sophisticated investment managers who employ teams of full-time analysts. We do not believe that it is wise to try and outsmart the market in this way, as no one can predict when the market will go up or down on a given day.
Second, we believe that it is a mistake to make emotional decisions when it comes to investing. Many investors panic when they see the markets going down. That makes sense as it is not fun to see your account losing money. However, when investors act on this emotion, they inevitably end up selling after much of the loss has already occurred, and they end up missing the gains that come when the market recovers. When the market is doing well again, they end up wanting to jump back in, and the end result is that they have sold low and bought high. Their emotions cause them to invest in exactly the wrong way.
Finally, we are always mitigating risks in other ways. A long-term investment horizon is the best way to avoid risk, as the stock market has always grown over time, for more than a century, even if it has lost money over shorter amounts of time. Diversification is the next best way to avoid risk, which is why we recommend stock funds instead of individual stocks. This is also why we recommend shifting your investments from the stock market into fixed-income (bonds and CDs) as you get closer to retirement. This lowers your overall risk as well as allows you to draw on that fixed-income percentage of your investments during a down market, so you have the time to let the market recover.
So we believe that it is very important to avoid emotional investment decisions and to stick with your long-term investment decisions. That is why we are here. We will remind you of this, regularly.
However, we are also tracking the market every day and paying attention to market indicators, with our eyes on the horizon rather than on the current day. Over the past year, the stock market has shown increasing volatility. Most of this activity has been centered around an impending trade war with China. The current administration has threatened or enacted tariffs a number of times, which has caused a drop in the market. In almost every case, the market has recovered these losses in the following days and has continued to grow. The most concerning example of this was last December when the markets dropped by roughly 9%. However, they rebounded by 8% in January and 3% in February.
The other large factor in recent volatility has to do with the “inverted yield curve” which happened this morning and has been impending. You don’t have to understand the details of that, but here is what it means: Investors are growing concerned about the possibility of a recession. The past 7 recessions have been preceded by this “inverted yield curve.” So investors are panicking, and that is why the market dropped today by almost 3%.
But this is what you most need to understand;
- This “market indicator” is not certain, by any stretch of the imagination. Many economists believe that the changes in federal and global economic policies after the last recession (in 2007-2008) have caused this “market indicator” to no longer be reliable.
- This “market indicator” is not immediate, by any stretch of the imagination. These past 7 recessions have started an average of 15 months after the inverted yield curve. So you could lose up to 15 months of market growth by selling today.
- The inverted yield curve has already “un-inverted.” The inversion was very short-lived and not very dramatic.
We believe that now is not the time to panic. There is never a time to panic when it comes to investing. However, it is wise to look at the horizon. There are warning signs that a recession may be impending. It is worth paying attention to the “inverted yield curve.” The possible trade war with China has been kicked down the road but may still happen in the next year. And the next presidential election in 2020 could cause more short-term volatility.
We do not recommend moving out of the stock market at this time, especially if you have an investment horizon of 7-10 years or more. However, if you are currently drawing on your investment funds for living expenses or very close to doing so, this might be the time to get more conservative in your investments. We are always available to talk with you about your investment portfolio. So please give the office a call if you would like to schedule a meeting to sit down with us.
Always at your service,
Tony and Jeremy