We hope this letter finds you and your families doing well. We wanted to reach out to you in the wake of the market’s difficult opening to 2016, because we share your concerns about the effect it has had on the broader value of investors’ portfolios.
In the past, our letters have often cautioned against losing the forest for the trees—getting caught up in short-term political or economic hiccups, or overestimating the effect of situations like what we’ve seen in Greece or China. When looking ahead five or ten or twenty years, it’s the long-run that matters. But at the same time, let’s be clear: the market is having one of its worst starts to any new year in history.
Many of the same factors that were the cause for volatility in 2015 are responsible for this year’s turbulence as well — slower growth in China, falling oil prices, geopolitical instability, and the threat of bankruptcies in high yield bonds. In our view, global economic fundamentals are less dire than market prices imply. It seems that the markets may be overreacting to fears rather than taking a good look at fundamentals. We do not believe conditions are in place for a recession in the United States or in the global economy. The U.S. has experienced a moderate economic expansion, and we expect that will continue. Europe should also continue to recover. While Chinese growth is slowing, it remains in positive territory. Falling oil prices remain a risk, but we believe the long-term decline has more to do with oversupply than falling demand.
Although the price declines we have seen in the market this year are unwelcome, the volatility we are experiencing today is a return to historical averages and is likely here to stay. In short, the volatility we are experiencing is a normal part of long-term investing. Inside of one year, and year-over-year, returns may be up or down, but over the long term, investors who stay invested demonstrate a stronger potential for realizing gains in the equity markets.
Consider for a moment a scenario where you missed just five good days in the market. Over the long term, this could cost your portfolio a surprising amount of capital appreciation. In the accompanying scenario, it cost the portfolio $150,000 by not being in the market on the five best days—and often, those five best days followed the worst days in the market within a couple of weeks.
When markets go down, people often assume further declines are in store. As of February 10, 2016, the S&P 500 is off -9.4%, the MSCI ACWI (global market index) down -10.34%, the Nasdaq off -13.65%, and energy is down more than 15% all since the start of the year. However, these kinds of drawdowns are more common than you might think. As we relayed in a recent newsletter, the past few years have had an abnormally smooth upward trend. According to Morningstar, more than half of the years since 1980 have experienced declines of 10% or more. When the market has experienced such a correction, the decline has averaged 14.2%. But here’s a surprising fact: In 58% of those years with a decline of 10% or more, the market actually ended up with gains for the year.
The key takeaway is to remain invested. Diversification helps us dampen our portfolios from volatility. And while staying the course might sound boring or even scary, it is likely the absolute best thing to do right now. Market volatility is the main catalyst behind a lot of bad financial behaviors – most specifically, buying high and selling low.
Your future is of the upmost importance to us. We look forward to meeting with and hearing from you throughout 2016. Thank you for sharing your financial journey with us, and we wish you the best as we move closer to what will hopefully be an early spring.
1 Source: Fidelity “Market Volatility”
 Source: Morningstar