News / Resources

We read a thoughtful analysis about recent stock market volatility that helps explain why, although the market may be reacting to some recent news or event, we most often recommend that clients remain invested without making changes to their investments.

This article from American Century Investments examines the volatility of the S&P 500 Index in the short term through the activity in October and November of this year, as well as over longer periods. Over the past two months, 27 of the 42 trading days recorded daily index price swings of at least +1% or -1%, while 12 of the 42 days had swings of at least +2% or -2%. Yet at the end of the 2 months the S&P 500 Index had a positive gain of over 10%. An investor who held on and ignored the volatility earned a nice reward.

Over a longer time frame the study indicates that daily market volatility goes through periods when it is elevated and periods when it is lower than on average. It exhibits a “mean reverting” property; i.e. when volatility is higher than its long term average there will more likely be a decline in volatility than an increase in volatility over some future time period.

Short-term volatility is simply a reflection of investor uncertainty. For example the S&P 500 Index declined -20.47% on Monday October 19, 1987, known as “Black Monday.” This was the largest single-day decline in the index since 1950. Yet the next 2 days the index was up 14.92%. The earnings of the companies within the index could not possibly have changed in a mere 3 days, so fundamentals do not explain the huge swing. Fear and greed, more than the value of the stocks, is often cited as the force behind these fluctuations.

Myriad global and economic issues certainly contribute to unrest in the market. The general culprits include the European debt crisis, the US deficit, political uncertainty, slow economic growth and weak employment. When investors feel uncertain they tend to react more quickly to news, thus increasing market volatility. Because their behaviors are not always grounded in sound financial analysis, an eventual inverse reaction is likely to follow. While we have seen market volatility increase of late (as well as trending up over the long-term), it does not preclude the possibility of earning positive returns. This is why we frequently advise clients not to make portfolio changes based on daily or short-term news. We may sound like a broken record but there is good reason to stay level-headed when things look dire. We can’t get rid of the fear and greed that drives much of the market fluctuations, but we can react wisely. As the great investor Warren Buffett says: “Be fearful when others are greedy and greedy when others are fearful.” ~Jill

I recently spent 5 days in Key Largo with a group of financial planners who had gathered to attend a program called “Inward Bound”. The purpose was to explore aspects of ourselves – subconscious behaviors, transformative experiences, and life purpose – and to practice skills that will help our clients make good, well-grounded decisions.

The fact is money is more complex than many of us realize. And there are two sides to money – the emotional subjective side and the technical objective side. Both are equally important. We may think we are making good objective decisions around our money when often times those decisions arise from our emotions. Take for example the Mini Cooper I bought in 2006. I fell in love with the Mini back in 2003 when I first spied this modern version British import as it zipped along Route 95. Delightful and rebellious, spunky, sassy, adorable and hip – the car screamed “own me!” Clearly BMW (the auto maker) made a direct connection with the less rational side of my brain. Had I bought the car just then, there would be nothing objective about the decision process. But I waited three years, saved some money, gave it a lot of thought and when the time came to put my Saab 900 to rest due to exorbitant and unrelenting repair bills Vinnie encouraged me to buy “Bettie”, the name I gave to my hot new Mini Cooper.

What took place for me in that time frame between 2003 and 2006, between wanting the car and acquiring the car was some bridge building between my emotions and reasoned thought – a merging of the subjective and the objective. Such that I explored the financial ramifications (the car is pricier than on average and what am I willing to give up?), the practical implications (can we fit a large man, a German Shepherd, a Nova Scotia Duck Tolling Retriever and me along with any bundles?), and the drive behind my goal (what makes the car so special and does this justify the purchase?)

As financial planners, we often witness this gap between the emotional and the technical. We see it in a choice to fund a child’s education at the expense of saving for retirement; when an unhappy career is sustained to support a particular lifestyle; when fear drives investment decisions, when impulse blows a budget; when procrastination prevents implementation of a plan. The Inward Bound experience has made me a little wiser on the topic and I hope to utilize this knowledge and help make a difference in our clients’ lives. ~Susan

Advances are made so quickly these days that it can be a struggle to keep up with what’s going on in technology. Those of us over 50 are just getting used to smart phones and learning to download “apps” while our children and grandchildren are texting at lightning speed. 20 years ago, we didn’t even have words like “netbook” and “paypal.” Now you can do all of your banking online, text message your kids from your phone and send out “tweets”! Before we’ve even mastered one type of technology it seems something newer arrives on the market. It is easy to see why some people, especially seniors, choose to just ignore it all.

There are good reasons to embrace what’s going on in the electronic world, some of which may help you lead a more active and enjoyable life. Technology can make our lives easier in many ways. For instance, banking on line, filing your tax return electronically, and being able to phone a friend while you’re out running errands can save time and resources. Keeping in touch via the web, whether through Face book, email or other social media sites, can improve a person’s emotional health.

In addition, adapting to the use of technology stretches one’s mental capacities which helps keep the brain in shape. Tackling challenging tasks such as learning to use an electronic item helps keep the brain from aging. There are word games and card games to play online. There’s a world of research to be studied at Wikipedia. Electronics can even help our physical well-being; a large segment of Wii users are senior citizens who play games that exercise their muscles (if you don’t know what Wii is – check it out!)

I think one of the most important reasons to embrace technology is because to ignore it is to limit your possibilities. So much of our commerce and social interaction has gravitated to the web that to disregard these options means becoming more and more out of touch with society. For instance, cell phones have become so ubiquitous that it’s hard to find a pay phone anymore.

The fear of using technology is that the “old ways” which seem more personal and simple will be lost. To some extent that is true; the art of letter writing is a diminishing phenomenon. But the “old ways” can co-exist with modern ideas. Just because you can use email doesn’t mean you can’t send a letter to a loved one. Technology not only exists to improve efficiency and productivity but is there to make life more fun and engaging and should be used in a way that personally enhances your day. ~Jill