Financial Advisor David E. Hultstrom wants to remind his clients that what happened this week in the financial markets wasn’t unprecedented, or predictable, or even material for long-term investors.
Sure, it’s painful when a middle-market retirement investor sees a $100,000 portfolio shrink by 10 percent to $90,000. And market drops can be scary, like careening 100 feet straight down in a rollercoaster after inching up bit by bit to the apex of the track.
But the extreme volatility swamping markets over the past 10 days has more to do with the future risks perceived by professional traders than with actual performance of a growing economy.
“Far worse damage is generally done to a portfolio by the reaction to market volatility than by the volatility itself,” Hultstrom, co-founder and chief investment officer of Financial Architects in Woodstock, Ga., wrote in an email.
Which is why Hultstrom likes to remind clients that long-term retail investors should remain diversified, follow dollar-cost averaging strategies and think about protecting principal with products designed to do exactly that.
Reasons for the wild swings varied from the end of “easy money” era to the rise in hourly wages and inflation fears to higher benchmark interest rates.
CNBC’s chief squawker Jim Cramer went so far as to blame the volatility on a “group of complete morons,” trading “leverage volatility products.”
Prices Swing, Values Don’t
Not that staying the course is necessarily easy with all the “noise” generated by market forecasts, cable news talking heads and market gyrations.
Friday a week ago, the Dow Jones Industrial Average fell 666 points following a better-than-expected jobs report fed inflation fears.
On Monday, after the yield on the 10-year Treasury note hit a four-year high, the Dow plunged another 1,175 points.
After rising on Tuesday and a period of relative stability on Wednesday, the Dow in Thursday dropped 1,032 points and by Friday was on track to post its largest weekly decline since October 2008, CNBC reported.
Indexes rallied Friday from correction territory with the Dow rising 335 points, or 1.4 percent, to close at 24,196, for a weekly drop of 5.2 percent.
Real negative economic data, meanwhile, was nowhere to be found and the value of the companies that underlie the stock prices remain largely unchanged.
“It is the prices of the companies that changed,” Hultstrom said. “If your holding period is long term, the value of the underlying companies is far more important than the currently quoted price.”
Wage earners can expect slightly higher paychecks later this month as lower withholding amounts from Trump administration tax cuts take hold. Meanwhile, some economists project that in 2018, more people will be employed than at any time since the late 1960s.
“It goes to show you that the market isn’t solely dictated by data,” said advisor Eric J. Dostal, advisor and vice president at Sontag Advisory in New York City.
A Perception Correction
Volatility in the stock market is normal, but because the market had proceeded to move upward in a gently sloping fashion over the past 18 months sudden hiccups were practically nonexistent, financial advisors said.
When the steep selloff finally arrived, many people were surprised.
But even with indexes flirting with correction territory of 10 percent or more during the week, properly diversified investors who still worried stiff about the whipsaw market movements were simply running a fool’s errand.
“Do we need to worry? Most certainly not,” Stacy Francis, owner of Francis Financial in New York City, wrote in an email.
Indeed, advisors even seemed to welcome the stock bubble letting off some steam, although the prudent among them might want to avoid putting it that way to clients.
“We’ve been preparing clients for this for a while because we haven’t had anything close to a normal pullback – something we’d see every 12 to 18 months – for several years now,” said Sandra Adams, a partner with the Center for Financial Planning in Southfield, Mich.
If clients insist on coming into the office to talk about their holdings, then at the very least it’s a good time to talk about redefining long-term goals, rebalancing portfolios and talk clients down from the ledge of acting rashly.
“The market is just back to where it was at the beginning of December,” Hultstrom said. “If the market had been flat since then, no one would think much of it.”
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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