When we think of market volatility we think of Stocks.
Equity markets are pushed around day in and day out by fear, greed, and news flow. Beneath the surface capital quietly moves from the inefficient companies to the efficient based on fundamentals.
All of this is perfectly normal. It is proof that markets will incorporate changes in sentiment and new information very quickly. It is proof markets work.
You would expect these variables to introduce uncertainty, and they absolutely have:
- Changes to inflation expectations.
- The pace of change in interest rates.
- The ongoing human tragedy in Ukraine.
- Seventy years of carefully built “just in time” global supply chains slowly recovering from a deliberate, full shutdown in Spring of 2020.
- COVID itself
Our compensation for enduring Stock volatility is that we reliably grow our assets net of inflation over time. Owning a Stock means we own a piece of a company and as an owner we get our fair share of the profits, income, and growth over time.
If you are concerned by Stock volatility remind yourself that these headlines will resolve or improve over time. Markets will grind higher. Importantly: They move higher before the issues are resolved. They move higher in anticipation of issues being resolved. This is why you cannot time markets and this is why we stay invested and follow our discipline.
Your professionally managed investments will take advantage of this volatility and shift capital from the fearful and impatient to you. All while staying invested.
When we think of Bonds we think of stability and income.
This year Bonds have been as volatile as many stocks. This may be unnerving. Especially for risk adverse investors simply trying to outperform “below inflation rate of return” cash and GIC rates that punish savers. Usually, Stocks and Bonds behave very differently. It is why, traditionally, these two asset classes are married to reduce volatility and solve for expected return. Stocks and Bonds both have superior expected returns to cash and GICs for very different reasons. From time to time they will move in a similar fashion. This year Stocks and Bonds are responding to inflation and interest rate changes which are causing them to misbehave at the same time. You are seeing paper losses on your statement. It is okay. These losses are only real if you panic.
Let’s look more closely at Bond volatility:
Holding bonds we own the debt of a company or government. We are essentially a bank. We lend money for a fixed period of time and at the end of that term we get our money back. Along the way we are paid interest.
This is important: We get our original investment back plus interest regardless of the volatility in the bond market. Price volatility only matters if we sell or buy before maturity. Think about the bond portion of your portfolio for a moment. On average, twenty to twenty-five percent of your bonds mature every year. There is plenty of cash maturing in your bond portfolio, by design, throughout the year to look after distributions and re-invest.
Reinvested dollars are either purchasing new bonds with higher interest rates or buying the bonds that are on sale. This adds to your future expected return. All you have to do as an investor is ignore the volatility on your statement and follow the discipline you have created with your advisor.
What about cash? GICs?
Cash is useful, but by holding cash and equivalents we are burning in the fire of inflation. We burn in that fire twenty-four hours a day; seven days a week. We are guaranteed to lose purchasing power over time. Therefore, we should only hold cash as a personal lifestyle reserve, for emergencies, or in anticipation of lumpy purchases and future income with little to no time horizon. Important Reminder: Although there is no volatility in cash and equivalents; there is the certainty that over time this cash will continually buy us less and less. Too much exposure to inflation and we have actually introduced more risk to your future plans than staying fully invested.
If you feel the need to connect we are here for you any time. We take our responsibility to you and your family very seriously. While counter-intuitive, the most appropriate response to volatility is to follow the discipline created by you and your advisor. This may feel like doing nothing and may be difficult, but I can assure you we are watching the building blocks of your portfolio very closely.