Mayday in May? Or Come What May
The stock market is a device for transferring money from the impatient to the patient.
— Warren Buffett
Let us introduce the logical investor. The logical investor understands the virtues of patience. Before investing, he has already set a minimum 10 years as his investment horizon to ensure that he receives positive returns. This logical investor, not unlike yourself, is also a little concerned about volatility in the market, as such, he decided to give up the possibility of a potential extra return — reducing his equity allocation to allocate some of his money to bonds. He knows the bonds will help absorb shocks in the market, and help alleviate the volatility of the portfolio.
The chart above shows:
How returns and volatility are related to your allocation between stocks and bonds.
That rebalancing (the act of ensuring the allocations in your portfolio do not deviate too far away from plan) will help manage the risk.
So what should one do when the invested assets suddenly don’t seem to behave anymore? These days it appears that markets will fall and then suddenly rise for no discernible reason. You, like the logical investor, may be the same investor with the same goals and the same long-term view that you’ve always had. You haven’t changed, but you find yourself asking, have the markets changed? The news you read and information you digest seem to suggest so. We perpetually find ourselves in new and uncharted territory, and with that comes the fear that somehow the market will continue to change, and not for the better.
To compound investors’ worries about the ongoing war in Ukraine, brisk inflation and an expected cycle of interest rate hikes from most of the world’s central banks adds several layers to your fears. However, now more than ever, is the appropriate time for the long-term-investing view. You should not be surprised at the volatility ahead, along with possible losses in a stock and bond market that low interest rates have fuelled.
By looking at what has happened in the past, you can understand better and maintain a more objective perspective. Volatility, as the illustration shows, is a constant that tends to spike when stock markets are suffering from losses and when many investors are near their wits end.
Over time, these inevitable valleys have given way to higher peaks. This is why we continue to invest to help get to our long-term goals, such as retirement, buying a house, or simply just accumulating more money. Selling in May, holding cash all the way will disrupt all these plans.
Our message to you remains the same. Tune out the day-to-day noise that may lead to impulsive decisions, stay true to your goals, and put your faith in a history that has rewarded those who embrace the long term. If you feel that the uncertainty has reached a point where you can’t take it any longer, feel free to come and chat with us.
