Making Sense of the Market

Posted by on February 5, 2016

The stock market so far this year has been up and down like a roller coaster. Year-to-date we have had 13 trading days when the S&P 500 Index was up or down at least 1% and the index is currently down about 5% for the year. Investors are feeling a bit whipsawed, and worried about their portfolios. Yet are the current market movements really so crazy?

A relatively tranquil market since the 2008 financial crisis has perhaps desensitized some investors to “normal” stock market volatility. Market declines in fact are a common occurrence. The table below illustrates the frequency and extent of such since 1926.

S&P 500 Loss

Number of Occurrences

Mean number per year

  -5%

300

3.4

-10%

 94

1.1

-15%

 43

0.5

-20%

 25

0.3

                                                                                                                                                                                                                             Ned Davis Research

Vanguard founder, John Bogle says in his Little Book of Common Sense Investing: “The stock market is a giant distraction to the business of investing” and then further explains: “The expectations market is about speculation. The real market is about investing. The only logical conclusion: the stock market is a giant distraction that causes investors to focus on transitory and volatile investment expectations rather than on what is really important – the gradual accumulation of the returns earned by corporate business.”

This is surely one of those challenging times when it is critical to focus on the long term. Throughout history markets experience cycles of undervaluation and overvaluation. And when they are overvalued they can become more overvalued before the pendulum swings in the other direction; likewise when markets are undervalued. Predicting top performing asset classes is impossible. Diversification is the cornerstone principle behind any portfolio design. (Along with a healthy dose of patience and discipline!)

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