LUTZ BUSINESS INSIGHTS

 

Lutz Financial: Market Update

JOSH JENKINS, CFA, SENIOR PORTFOLIO MANAGER & HEAD OF RESEARCH

After recently hitting an all-time high, the U.S. stock market has experienced a return to volatility. While it’s perfectly natural to be uncomfortable watching the prices trend lower the way they have, it’s important to remember gyrations in a given week, month, or even year are generally not going to impact your financial plan and long-term goals. Still, we felt this was a good opportunity to reach out and let you all know what we are thinking.

Market Declines are Normal and Healthy

Last year was smooth sailing for investors as the market steadily marched higher with virtually no volatility. That experience was highly unusual, however, as the table below illustrates. Based on a study from the Capital Group, the stock market experiences a decline of -5% or more three times a year on average, and a -10% decline once a year. What we are experiencing today is normal, the uninterrupted gains of 2017 were not.

A History of Market Declines

After an extended period without a meaningful pullback, it’s easy to become complacent. When the market finally does retreat, it can feel like a shock to the system. The financial media certainly does not help the situation. Their business is predicated on attracting viewers, and perpetuating fear is extremely effective at doing that.

The truth of the matter is the market can sometimes rise too far too fast. When this happens, prices need to correct and reset for future gains. The beginning of this year offers a great example of this. Stocks went gangbusters in January, dipped in February and March, then rebounded and steadily moved to new highs.

While we know declines are an inevitable part of the market cycle, we don’t know how long they will last, or how far prices will fall. It is okay not to know these things, because nobody else knows either. The important thing is having a plan in place for when they arise.

The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” – Warren Buffett

Emotional Investing Leads to Bad Outcomes

When it comes to building and maintaining wealth, investors are often their own worst enemy. Rather than execute decisions based on thorough analysis, they have knee jerk reactions based on fear and greed. Everyone is susceptible to this pitfall – it’s the result of thousands of years of evolution. Our ancestors living in caves would not have survived long enough to procreate if they stopped to do a S.W.O.T. analysis each time they sensed danger. The fight or flight response kept them alive. While these emotions can keep us from physical danger, they often lead to poor decisions when it comes to investing.

The chart below from J.P. Morgan illustrates the conclusion of the prominent DALBAR study, which measured investor returns over a 20-year period. The result is not pretty. The average investor (orange column) earned just 2.6%, much lower than the funds they were investing in! The underperformance is largely the result of poor timing decisions, such as chasing recent winners and dumping recent losers. It may seem obvious that buying high and selling low is a poor strategy, but our raw desire to have more money than our neighbor, or to protect our life savings from decline can trump rational thought. A disciplined investor that was able to buy and hold a balanced portfolio like the 60/40 or 40/60 on the chart would have more than doubled the return of the average investor. Compounding a reasonable return over the next 20 years is how you build wealth, not trying to pick the next Amazon.

20-year annualized returns by asset class (19998-2017)

What Should Investors Do?

The best thing for investors to do is tune out the noise from the day to day gyrations in the market. Understand there will be bumps (sometimes large ones) in the road from time to time. Remember this is normal, healthy, and often offers a good opportunity to buy at a discount or harvest some losses. Keep emotions under control. Don’t become too excited when things are going well, or to down when things look dire. The best advice anyone can give, is to build a sound plan and then stick to it.

 

Important Disclosure Information

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz Financial.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  Lutz Financial is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.  A copy of the Lutz Financial’s current written disclosure statement discussing our advisory services and fees is available upon request.

ABOUT THE AUTHOR

402.763.2967

jjenkins@lutz.us

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JOSH JENKINS, CFA + SENIOR PORTFOLIO MANAGER & HEAD OF RESEARCH

Josh Jenkins is a Senior Portfolio Manager & Head of Research at Lutz Financial with over eight years of investment experience. He is responsible for assisting clients in the construction, selection, and risk assessment of their investment portfolios. In addition, Josh will provide on-going research and trade support.

AREAS OF FOCUS
  • Asset Allocation & Portfolio Management
  • Investment & Market Research
  • Trading
AFFILIATIONS AND CREDENTIALS
  • Chartered Financial Analyst (CFA)
  • Chartered Financial Analyst Institute, Member
  • Chartered Financial Analyst Society of Nebraska, Member
EDUCATIONAL BACKGROUND
  • BSBA, University of Nebraska, Lincoln, NE

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