Many of you are receiving your performance review reports and the year-end market update (see latest Newsletter with full commentary). Since we closed the books on 2015, we have seen US and overseas stock markets decline sharply, with the S&P 500 entering correction territory again (falling 10% or more from highs in May). Many of the themes that dogged markets in the summer, including a looming economic slowdown in China and plunging oil prices, have contributed to the pullback.
- What are we doing? From an investment standpoint, we are reviewing our asset allocation targets – as we always do – and ensuring we have a high-quality mix of bond and stock funds. We are also fine-tuning the allocation to each investment category to maintain an appropriate level of market exposure, risk, and return potential.
- What aren’t we doing? Selling just because we are witnessing market declines. After the last market decline in August and September, stocks came back strongly in October, with the S&P 500 rising 8% for the month. While there is no guarantee against further declines, the long-term evidence is clear that lower prices eventually lead to higher future returns.
“According to research from Dimensional Fund Advisors (DFA), we’ve seen 28 instances where stocks fell at least 10% on consecutive trading days—reminiscent of the experience since the start of the year. On average, stocks were up over 23% in the following twelve months, almost 9% per year over the following three years, and over 13% over the subsequent five years.”
Finally, as Ben Carlson writes in his Wealth of Common Sense blog, “while losses in the stock market are never enjoyable, they’re still the best chance most of us have of seeing large gains in the future.” (Barrons.com: 1/19/16)
Please see Bright Side to Stock Rout for the full article.