DALLAS — After a volatile start to the first week of trading in the 2016 calendar year, some investors are understandably concerned about their portfolios, but long-term investors should continue to consider their objectives and time horizons.
David S. Spika, global investment strategist at GuideStone Capital Management, LLC, offered perspective on the current market, noting 2016 likely will be a volatile year. Last year, after a bout of volatility, Spika was featured in a commentary posted on GuideStone’s website, explaining the nature of the stock price swings at the time, as well as offering perspective on the market. In reflecting on the current market news, he said the volatility experienced in the second half of 2015 will likely persist for the foreseeable future and is not abnormal in the later stages of an economic cycle such as today.
Additionally, Spika said GuideStone does not believe that this week’s sell-off portends another financial crisis like 2008.
“Investors entered 2016 with very little conviction about the stock market,” Spika wrote in a commentary on GuideStone’s website. “2015 ended on a weak note and most were in agreement that the global economy is slowing as we near the end of the economic cycle, while the potential for stock gains is limited. The pessimism was further supported when the Chinese government allowed its currency to depreciate, which caused losses in Chinese stocks as many saw the currency move as a sign of greater economic weakness in China than what’s been disclosed.
“These pressures have been further exacerbated by another leg down in oil prices as inventory data continues to demonstrate excess supply, and concerns grow about global demand. Finally, fresh geopolitical concerns have appeared as a result of actions in Iran and North Korea.”
Spika said active management firms, like GuideStone, are thought by many to be better suited for volatile markets, which create more disparity among stock prices, giving our sub-advisers a better chance to identify companies that are undervalued.
Spika said it’s also important to note that stocks have produced a positive first quarter gain 50 percent of the time following a 2.5 percent or greater drop in the first three trading days.
“As we’ve been consistent in saying, we believe economic growth will be lower than historical norms this year, likely in the 2 percent range, while investment returns will be modest,” he said. “Based on our analysis, the U.S. stock market has the potential to return low- to mid-single digits this year, but in a volatile fashion. We don’t see a recession on the horizon, so we don’t believe a bear market is likely near term."
GuideStone President O.S. Hawkins echoed Spika’s insights.
“Long-term retirement investors should keep their focus on their goals and not on short-term market fluctuations,” Hawkins said. “Participants should focus on being appropriately diversified, their long-term investment objectives and time horizon and less on day-to-day market moves.”
When dealing with a period of volatility, GuideStone believes investors should keep four principles in mind:
- Always focus on your objectives, not your emotions. Specifically regarding retirement participants, these assets are to serve your needs for a long period of time. Make sure your objectives and actions are consistent with your time horizon.
- Avoid making impulsive decisions. “Guard against making ad hoc changes in your portfolio,” Hawkins said. “Making changes based on short-term market movements is almost a guarantee for failure as it promotes buying high and selling low.”
The performance of your account moving forward will be determined based on results of the financial markets in the future, not the past. Selling today cannot avoid yesterday’s losses in a down market. Likewise, in an up market, you cannot buy yesterday’s performance by investing in the hottest fund.
- Don’t count losses (or gains). Consistent contributions to a retirement plan afford investors a systematic way of taking advantage of investment opportunities as markets ebb and flow.
- Maintain realistic expectations about market behavior. Financial markets in the short term tend to fluctuate in response to social, political and economic events. However, historically, the markets stabilize and return to profitability over the long term, focusing on the underlying fundamentals.
“The next few months, as we move toward the presidential elections, may be choppy for investors, but long-term investors should continue to focus more on their objectives and less on the minute-by-minute headlines,” Hawkins said.