We generally get lulled into a steady and comfortable growth in the markets for a period of time with very limited market volatility and when the market corrects, we are not prepared. Market corrections are not only expected, but you should be comfortable with them occurring more frequently.
It is the volatile times in the markets when courage to maintain your investments is rewarded. Those most hurt are investors that are driven into irrational decisions to join in the panic and sell after the market has already moved so significantly. Strong portfolio construction and investing with a clear perspective that it is for the long term will prove beneficial. Here are some specific aspects to consider in markets and portfolio construction:
Length of correction
When a 10% correction occurs, it can take 3 months or more to see the markets recover to pre-correction levels. A 20% correction occurs less frequently but can be expected every several years. Because of the magnitude of a 20% correction, it can take a year or longer to have full recovery, but they have always recovered.
The stock market is an auction, and unlike a traditional auction, the price is based on the foreseeable future value for the business. Unfortunately, if there is concern that a company will be less profitable in the near term, their market price is negatively impacted. While this does not mean the company will be closing its doors, the near term view pushes their price down. It is the near term valuations that drive market volatility. Remember to remain focused on the long term.
The US economy is strong and continues to grow. There is currently no anticipation of a recession in the US. While growth has not been at a significant pace, a 2% annual growth in the US adds over $350 billion in growth which is more than the total economy of many countries including Austria, Finland and Denmark.
Your portfolio should be allocated across a number of asset classes with the goal of producing a consistent long term rate of return. A global allocation blends investments from around the world with diversification into many individual investments within each asset class. We believe the portfolio should include an emphasis on the largest companies in the world. It is difficult to imagine why Apple, Google, Sony, Volkswagen, Samsung, Coca-cola, Pepsi, etc. do not make sense to own for the long term. Additionally, the diversification prevents any single company from negatively affect the performance of the total portfolio.
With interest rates at tremendously low levels, we believe that you should be cautious in the average maturity to protect against rising interest rates. The FED has been raising rates recently and there has been discussion about increasing inflationary pressures which would indicate additional increases in rates.
A prudent approach to portfolio construction and focus on long term investing is the best process to follow. To learn more, contact our team. We’re here to help!
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