By Matt Harlow, Chief Investment Officer
If you have been reading the headlines the past month, you’ve likely seen some discouraging economic news, especially regarding the stock market.
Oil prices have plunged this year due to expectations of increased supply and reduced demand. There are renewed concerns that the economic slowdown in China could be more severe than previously thought. We would like to provide some perspective during these volatile times.
As of the close of market on January 21, 2016, worldwide stock markets have been down between 8 -12% year to date. The S&P 500 was down over 8.5%. Intra-Year declines are very common. Attempting to time the market until “things calm down” may have undesirable results. The chart below illustrates intra-year declines in the S&P 500 and the corresponding calendar year return going back to 1980.
Investment Strategies to Consider
It may sound counterintuitive, but a down market can be a time to buy. The chart below shows a hypothetical scenario applied to three portfolios with identical holdings, but with three different contribution/withdrawal strategies. Investor A adds $5,000 to the portfolio every time the S&P 500 index falls 10% from a previous high. Investor B stays the course at all times and Investor C converts to cash temporarily after the S&P 500 declines 10%.
Another interesting point to look at – how has the S&P Index performed historically after big drops in oil? The chart below shows us those results:
The Bottom Line
We can’t say for sure whether or not the market has reached the “bottom” or when it will, but the truth is no one can. With market fluctuations, some of your allocations will likely fall off target portfolio allocations. It’s very important that you feel comfortable with the allocation model you have in place and the amount of risk and downside protection it offers. Just beware of making emotional decisions based on a volatile start to 2016.
Investments are subject to various market, political, currency, economic, and business risks, and may lose money. Larson Financial Group and Larson Financial Securities cannot and do not guarantee financial or investment results. Charts/graphs provided are for illustration purposes only and are not recommendations of any particular strategy, purchase or sale of any security. Past performance is not an indicator or guarantee of future results.
The S&P 500 Index is a gauge of 500 U.S. large cap stocks. Returns do not reflect any fees, expenses or sales charges. Investors cannot directly invest in an index.