Calling 2016 an eventful year in the stock market feels like a bit of an understatement. We started the year with negative sentiments stirring fear in many. After the first full week of 2016, USA Today headlined an article noting, “Stocks close out week with worst start to year EVER.[i]” It was nerve rattling, to say the least. The end of January was no better with the market diving as much as 500 points in one trading day, only to close at a loss of 250 points.
The market dropped quickly in reaction to slowed growth in China as it shifted its economy from one fueled by trading with other countries, to one that is driven more by internal consumer spending, similar to the U.S. To further fears, oil was selling at $28[ii] a barrel in early 2016, sending many corporations tied to the oil and gas industry into a downward spiral. While crude oil prices have recovered greatly, unrest in the Middle East, has kept oil prices lower than the commonly seen $100 a barrel price from the 2011-2014 period.
Then in late June, the world was surprised by the British Exit coined “Brexit” vote to leave the European Union. The decision had immediate ripple effects around the world, causing stock markets to plummet and the British pound to fall to its lowest levels in decades.
Shortly thereafter, the US election surprised the world again with presidential candidate Donald Trump making an unforeseen surge to surpass Hillary Clinton and become the 45th President of the United States. As the US election announcements were declared, overseas markets sharply declined. However, by morning, the market had reversed course to start what has been coined as the “Trump Rally” through year-end.
Just over a week away from the 2016 year-end, the S&P 500 is closing in on a 10% gain for the year and the Dow, a gain of approximately 16%.[iii] Hardly anyone remembers that just 11 months ago, the market was down about 9% and people were questioning whether the US was heading into a bear market.
Everything in hindsight is 20/20. However, what 2016 emphasizes again is that the disciplined investor who stays the course, or in this case, stays invested in the market, wins! As the saying goes, it is an investors’ time in the market, and not market timing that yields returns.
Many investors are stirred by unpleasant financial headlines, political shifts or negative market sentiments that are backed by very convincing data. However, reacting on emotion can have a detrimental effect on an investment portfolio. The important thing that a long-term investor needs to know is that after each market decline, the market pushes on to new record highs. This is why those who sell at the bottom of the downturn, locking in losses, are often regretful later on. Although it is sometimes difficult, those who are patient and do not panic are rewarded.
Case in point, a person invested solely and unwavering in the S&P500 during the 2010’s would yield a whopping return of 95% on their investment. However, if that same investor were to have timed the market and missed just the top 10 performing days in the market, their return would drop to 34% during the same window.[iv]
History has shown that the best-performing asset class doesn’t hold the position very long, and changes quickly. U.S. large company investments, like the Standard and Poors 500 index, had a good run since the bottom of the recession in March 2009. In 2016, the U.S. small companies, emerging markets and U.S. value asset classes took the lead, proving that a diversified strategy is often the most prudent way to invest.
Sir John Templeton, one of the founders of the Franklin Templeton mutual funds, famously said, “The only investors who shouldn’t diversify are those who are right 100% of the time.” One of the more reliable strategies in a volatile market is to build a portfolio that is just the opposite of “putting all your eggs in one basket.” It’s difficult to guess the best-performing asset class for the year, even for research firms that study investments 24/7 with analysts stationed around the world. When you have a globally diversified portfolio that balances all of the available asset classes, no matter which asset class is performing well, you will benefit from its good performance.
Taking advantage of the market’s long-term potential is one of the better ways to beat inflation and accomplish your family’s most important goals. Don’t forget, time is on your side!
[iv] S&P BofA Merrill Lynch US Equity & Quant strategy, Table 3: S&P 500 returns by decade excluding the 10 best days