Volatility is one of the few certainties in financial markets. You never know when it’s coming, but eventually investors face it and when they do it changes their views about risk. Risk isn’t only theoretical, risk happens.
I’ve written in the past about how we work with clients to decide on an appropriate level of risk, but much of that work is hypothetical. It’s one thing to say that you can handle a 10% drop in your account. However, it’s another thing entirely to experience that drop. The most recent correction in the stock market offers us all a great opportunity to rethink the level of risk we are truly comfortable taking.
To put the most recent correction in perspective, the S&P 500 reached 2,130 on May 22nd and closed at 1,867 on August 25th. This measure of U.S. stocks declined about 12.4% during that period. That makes it more than the 10% threshold to be called a “correction,” but less than the 14.2% decline that we observe in an average year. Historically, a 10% decline happens about once per year, a 15% decline about once every two years and a 20% decline about once every three and a half years.
Why is this decline any different? It’s not! The only thing that makes it feel different is that it is the most recent one. It’s been about four years since the last 10% or greater correction and since then the market is higher by almost 60%. That doesn’t change the fact that when we experience the most recent correction it instills feelings of nervousness and worry.
This may be a perfect time to analyze the amount of risk that you are comfortable taking. If this most recent correction is to be expected about once a year, then how do you feel about that? No one likes losing money, but this shouldn’t be causing you to lose sleep at night or to worry about your future. This volatility is fairly normal. Does it bother you more than a normal move in the markets should? If the answer is yes, then it’s a good time for us to talk. Give your advisor a call and discuss the level of risk you are taking.
There isn’t one right answer and I’m not suggesting changing risk levels frequently. However, getting the level of risk right is absolutely crucial to your long-term financial plan. Finding a level of risk that will accomplish your goals and allow you to comfortably stick to your plan when markets correct is perhaps the most important function of a financial advisor. As your financial advisors, we want to get this right. Your trust matters to us. As we include in every piece of communication, trust matters. Risk matters as well.
From the desk of Larry Carroll
This article was an excerpt from our Fall 2015 Quarterly Newsletter. To view the full newsletter click here.Market Volatility, Quarterly Newsletter, Risk