I read a quip in the local paper over the weekend: The stock market takes the stairs up but the elevator down. As I felt the elevator begin its descent this week, my stomach lurched a bit, but I kept coming back to the fact that good investing requires discipline and a bit of courage. You need discipline to stick with a well-established long-term investment plan and courage to endure short-term volatility.
The correction in the stock markets worldwide over the past week is understandably disconcerting. Investors are wondering what happened and what’s next for global markets.
First, some perspective.
- Market corrections are not unusual. On average, equity markets experience a correction, defined as a drop of 10 percent or more, every 18 months. It’s been nearly four years since the market entered correction territory in October 2011. Even with this context, it’s difficult to stomach sharp drops in the market. I urge investors to look more broadly and consider the recent dip against a backdrop of a long period of steady market gains. Over the past month, the S&P 500 Index dropped about 10 percent, albeit gaining back some ground recently. By contrast, the index has risen more than 200% since March of 2009. This week’s events, although unpredictable, are part of the broader cycle of market ups and downs.
- Multiple factors contributed to recent volatility. Many headlines point to China as the cause of this week’s equity sell-off around the world. Yes, fear of weaker growth in China and the recent devaluation of the yuan certainly contributed to the volatility in the global markets, but those aren’t the only reasons. Global growth expectations beyond China remain tempered, commodity prices are falling, and no one knows for sure when the Federal Reserve will raise interest rates. These economic challenges have been around for some time, and we expect they’ll continue to create periods of volatility in the future.
- The U.S. economy remains resilient. Despite global headwinds, economic indicators such as employment, housing statistics, and consumer confidence continue to show healthy gains. Escalating volatility may impact the timing of a decision by the Federal Reserve to raise interest rates, but we believe a 2015 rise is still likely.
Second, some patience.
This is the challenging part of investing. It’s tough to sit tight and stay calm when we live in a world of 24-hour news cycles amplified through social media and smartphone alerts. “Tuning out the noise” is difficult when the noise is seemingly everywhere.
No one can predict what’s next for global markets. That’s why today’s chatter about what the market is doing or might do is meaningless, and potentially dangerous, for the long-term investor.
Advisors play a critical role as a behavioral coach to clients, especially during times of uncertainty. Here are a few best practices advisors are using to counsel and reassure clients.
- Engage. Reach out to clients to discuss what’s going on in the markets and how their portfolio is positioned to tolerate volatility.
- Empathize. Provide guidance when emotions threaten to deter clients from their established plan. As a financial professional, you’re accustomed to the markets’ ups and downs; your clients may not be.
- Educate. Deliver ongoing education about market cycles and volatility’s place in a portfolio. Messages about potential risk and reward may be difficult to hear during a market correction, so provide reminders about discipline and long-term planning during quieter times to help reinforce these points.
Our Client Relationship Center has resources to help you with these conversations and keep your clients focused on what they can control: goals, asset allocation, costs, and the discipline to stick with their financial plan. These are the four principles that drive investment success. Advisors who can help investors adhere to these four principles, while providing some perspective and patience, will provide significant value to their clients.
This article was written by Mortimer J. “Tim” Buckley, chief investment officer for Vanguard.