After a rather trouble-free first half of the year, increased volatility returned with a vengeance during the third quarter causing many investors to re-evaluate their strategies.
Unsurprisingly, we all feel uneasy when equity markets fall and it’s easy to react emotionally to news events which may cause unsettling movements in our markets. Historically, October has been somewhat of a Jekyll And Hyde month for equity markets as some of the most devastating moves in history (1929 and 1987) have come during the month. However, in reality, October has been a rather good month for equities with the S&P 500 averaging a 1.38% return since 1980. Additionally, the 4th quarter of the year preceding a Presidential election has produced excellent returns averaging 5.88% since 1991. Is it different this time? Possibly, but outside of a black swan event a major decline is somewhat unlikely in our opinion. Pullbacks and corrections are a normal part of long-term investing. Planning now may help you avoid panic later. We all realize that emotions are of little value in successful investing, yet removing emotions is easier said than done. Rather one must understand their personal risk tolerance and their investment strategy. Neither panic nor greed is a good investment strategy. When markets are good one must remember that stock prices and profits won’t go up forever. Conversely, when markets drop, the manner in which investors respond emotionally is equally as important. Be certain your portfolio matches your investment time horizon, risk tolerance, and goals.
My years of experience investing certainly helps with keeping my emotions in balance. However, there is no investment strategy that consistently works over short periods of time. I have seen many conservative investors become greedy after major increases in equity markets and then equally negative after large declines. Be true to thyself as my experience teaches me – this is the recipe for success or failure. There is not a single asset allocation plan that I know of that keeps investors calm during extreme market volatility. One thing I feel certain of is the death of the 60/40 allocation model where one size fits none.