Aug. 21 Memo to Clients re: Stock Declines

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The past few days have seen sharp declines in US stock prices, but as of August 20, the S&P 500 stock index is down all of 1% for the year, and still above its January 30th low by approximately 2%.  The current problems for the market range from slow world-wide economic growth; to more specific problems in China, and certain European countries ( eg, Greece);  to sharply declining commodity prices (which has a mixed impact on various countries, depending on whether they are primarily producers or consumers of commodities); to the likely beginning of interest rate increases in the US. Having stated the problems, it is important to note that none of them are new to the markets.

It is also worth noting that US interest rates on high credit bonds have declined modestly during the recent stock price declines, which means those bond prices have increased modestly.

As a context for the current stock declines, since the more than 50% declines that ended in March, 2009, the S&P 500 index has tripled in value (low of 677 to current 2,036). During this six plus year time frame  there has been only one period with serious stock price declines, from April 2011 through October 2011, when the S&P 500 declined  20% (1,362 to 1,100).  Since that 2011 decline ended, the index is up more than 80%.   Many of these historical figures can be found in our regular Monthly Comments.

In considering our message for the current stock price declines, we thought a repeat of portions of our August 2011 memo would be appropriate.

“We want to reemphasize our commitment to the idea that properly developed asset allocations, designed specifically for each client’s goals and risk tolerance, provide the basic rationale for not changing investments during periods of extreme downward market volatility….”

After presenting various figures, and a discussion of the problems of that time, we concluded as follows:

“As usual, we make no predictions as to whether these problems can be solved in a reasonable or timely manner. The future is always unknown. However, to the extent your financial goals require investments in what are by definition uncertain markets, we continue to advocate that your best defense is to maintain an asset allocation that allows you to get through times of high volatility without making changes that involve selling the poorly performing asset class.”

We would also add that it should not be surprising for stock prices to experience some period of decline, given the remarkable gains of the past six years.  There is no avoiding the investment truth that stocks can provide both significant gains, as well as uncomfortable declines. Trying to time these price moves we believe cannot be done consistently. Relying on your established allocation continues to be the best way to navigate the inevitable periods of downturns.