The past week, we’ve seen some terrifying headlines about the market. My best advice is to ignore them. The attention grabbing headlines do a great job of scaring people but have little to no actionable value.
Today, I discuss global markets, corrections, sustainable investing and the frightening news coming from the UN.
Impact’s Portfolios and the Global Market
This year, the global market has been held up by only a few US sectors (technology, health care, and consumer discretionary), and within those sectors, just a handful of stocks have been driving almost all of the positive index returns.
Our portfolios have exposure to most of these stocks but are underweight in some of the major names concentrated in the S&P 500. Most areas of the global market have been firmly in negative territory so far this year. In fact, the US is one of the only countries that has had a positive return year to date.
Impact Fiduciary focuses on broad diversification across all major asset classes. Exposure to fixed income, alternatives, and both US and international stocks should minimize risk over the long term. However, when there is a massive divergence in the market, like what we’ve seen this year, it makes for a highly challenging environment.
The main areas that have stumbled in our portfolios are the international markets, the basic materials sector and the clean energy stocks, which are all down over 10%. The Mac Solar Index is firmly in bear-market territory, as it has declined by over 20% for the year.
Trade wars and increasing interest rates are the main culprits of the recent volatility. However, volatility in the market is perfectly normal. In fact, in the last few years, we have seen very little volatility on the downside, as the markets have been unusually accommodating.
Are Corrections Normal?
Author and money manager Ben Carlson examined the S&P 500 data going back to 1950 and found 28 time periods when stocks fell by 10% or more. He found that on average, the market has entered correction territory every 2.25 years. Here are some fun facts:
S&P Losses of 10% or More Since 1950
Total Occurrences: 28 Times
Average Loss: -21.6%
Median Loss: -16.5%
Average Length: 7.8 months
Loss Greater than 20%: 9 times
Loss Greater than 30%: 5 times
As you can see, the average post-1950 market correction lasted just under eight months, and the median total loss was 16.5%.
What about deeper declines? Of the 28 times the S&P 500 decreased by 10%, the market suffered a loss greater than 20% -the standard definition of a bear market – only nine times (32% of the time) and a loss greater than 30% only five times (18%). The data confirms that, although these types of large losses do occur, they really are the exception, not the rule.
What do all these declines have in common? The markets have recovered 100% of the time and have gone on to make new highs. This is why staying the course is so important.
Can You Stomach the Roller Coaster Ride?
Most clients tell me they are fine with a 10% or 20% downturn. I think, on some level, they believe this is the “correct” mindset and what they should be saying. The reality, though, is that everyone has a different risk tolerance and there is absolutely nothing wrong with being more conservative.
Theoretically, 10% down doesn’t sound that bad, but in real life, it can be painful to experience. This is especially true if you’ve never been through a market correction before. The best advice is to put everything into context and focus on the big picture.
In most cases, you are going to be better off riding out the volatility and sticking to the original investment plan. However, sometimes it makes sense to adjust to a more conservative portfolio. I’m all for lowering risk if your initial goals have changed, if it helps you sleep better at night or if its the only way to keep you invested in the market.
UN Climate Change Report
The truly terrifying news of the last week was the UN Climate Change Report. The main takeaway is that we aren’t taking enough action to curb carbon emissions, and we are running out of time. That’s why, despite the recent negative performance and volatility, I believe it’s more important than ever to invest in clean energy. I’m proud that 10% of Impact Fiduciary’s stock allocation is invested in this area of the market, which really does have a meaningful impact.
I believe that the combination of governmental action and profit-driven companies offers the best path for solving the climate change crisis. Unfortunately, the government part of the equation has been severely lacking in the US over the past two years. It’s now more important than ever to divest from fossil fuel companies and invest in clean alternatives.
Aside from the positive social impact, solar and clean energy offer an extremely high return in the future if they continue to grow exponentially. The key here is patience. I would much rather forgo small short term gains in order to support an industry that is literally trying to save humanity from one of the most pervasive issues of our time, climate change.
Impact Turns One
Impact Fiduciary recently celebrated it’s first anniversary! This past year has been the most fun and rewarding of my career. I’ve genuinely enjoyed strengthening existing relationships and making new connections.
At Impact Fiduciary I have helped clients formulate investment strategies to reach their long-term goals, restructure and pay off debt, minimize taxes, protect their loved ones and increase their net worth all while focusing on sustainability.
I’m truly inspired every day by my clients. The enthusiasm and positive energy is contagious. Thank you all for your support!
I am grateful to have the opportunity to serve you. If you have any questions or concerns, please don’t hesitate to reach out to me.
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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Patrick Dinan, and all rights are reserved.