What difference do you notice in the pictures below?
These two pictures represent the S&P500 Index performance from this past week and of course, an amusement park roller coaster. The path each of these took is the same. So what can we learn and where do we go from here?
First, how did the ups and downs make you feel? Excited about opportunities or anxious and nervous about fluctuations in account values?
A Gut Check: This is the perfect time to see how you felt seeing the swing(s) up and down in your portfolio. If you have some big goals (large purchase, children’s education, retirement, etc.) that are near-term and you can’t handle the volatility that can erupt in the market, something needs to be changed. These are all dependent upon your savings being there when you need it.
What is different about the investment world now than back in the Financial Crisis of 2008?
Investments Available: While there were some market neutral or inverse investments, many more have been created since. They come in all sorts of “shapes and sizes.” Some are market neutral and not impacted by volatility. Others are inverse or even double and triple inverse meaning they are meant to perform well in a down market. There are also sector rotation investments that move to the areas that should perform better due to the market environment.
Costs to Invest: Custodians are constantly competing with each other for business. One way this has been seen is by the significant reduction in transaction costs over this same period of time! Consider that a few years ago you might have paid $19.95 per trade, then $8.95 per trade and now $4.95 per trade and lower. And if you use the specific funds of your custodian, there may not be any transaction costs to buy or sell an investment all together.
Why do we point these things out?
It is important to remember that times change and we have to remain flexible along the way. Arguments for being a passive investor that makes few changes over time and ride out the swings of the market have merit just like arguments for being an active investor that makes frequent changes. And there is also the investor in between who is not comfortable riding out another 2008. The person who will place trades to keep gains, sit out during uncertainty, and get back in when there is clear direction ahead. It’s important to know which investor you are.
We have to keep challenging our investing assumptions as the world and economy is ever-changing. One event could cause you to become more active or passive based on your goals.
So where do we go from here?
The market did drop this week on the geopolitical risks and threats of nuclear missiles being fired. This is expected as a protective measure against the unknown. However, what was reassuring was the strength of the market. Even though we did see a downturn, it wasn’t that large of a drop given the news. There wasn’t a sense of panic, but rather that of protecting gains and caution. The strength of this quarter’s earnings, continued strong labor reports, and tame inflation data out today are all contributing to a stronger economy. Remember a couple of weeks ago here we reviewed the strength of the economy but also cautioned ahead.
During the geopolitical tension, it has been interesting to read not only about the US and North Korean threats but also to hear from other countries like China. In an effort to ease tensions, other countries have started to speak up stating their position of support or lack of. Hearing this takes away uncertainty of how other countries will act if missiles were to be initiated by either side. You can read those articles below:
We don’t believe the geopolitical risks are over. Take this time to review your investing strategy for any changes that need made.
The biggest difference in the images above is our attitude towards each. We depend upon our savings to live far beyond our working years. The real roller coasters should be saved for the theme parks where we choose to go for short periods of fun!
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