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February 4, 2016

The Good Side of Bad Markets

January was a difficult and volatile month for investors and it came on the heels of a difficult and volatile 2015. After the recent downturn, it’s understandable if you wished that the markets were a bit tamer.  Wouldn’t it be nice to get a steady return somewhere around 4% every year rather than deal with all these ups and downs?
 
Be careful what you wish for because the very fact that stock downturns scare people is one reason why stocks deliver a higher return than bonds over time.  Economists call it the “risk premium.”  This roughly means that people are not willing to pay as much for an investment that will periodically frighten them to death as opposed to paying for an investment that delivers a less exciting investment ride.  Stocks over time have been a fairly consistent bargain relative to less volatile alternatives, which is another way of saying that they’ve delivered higher long-term returns than bonds and cash.

There’s no question that the downward plunge on the stock market roller coaster is scary.  It’s hard to maintain your discipline when the voice in the back of your brain is telling you to bail out on the bouncy trip before somebody gets hurt. 
 
We do not believe that this correction has been deep enough to create great buying opportunities. Essentially, we have been retesting the lows from last fall. However, unless this is the first time in history that the market goes down and stays down forever, we will ultimately look back on the decline and see that this was a buying opportunity instead of a great time to sell and jump to the sidelines.  The patient, disciplined, long-term investor should see market volatility as his or her best friend and ally during the journey towards retirement prosperity.
 
Bottom Line: Volatility is a certainty and we are in a correction. We continue to believe that the risk of a recession is very low. Low energy prices hurt energy stocks, but help the other sectors in our economy. We have never had a recession caused by low energy prices. This too shall pass.

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