There’s no question there’s been “market volatility” in response to the Federal Reserve’s confirmation that monetary stimulus will begin to taper. And when we say “market” volatility here – it’s really ALL markets – stocks, bonds and alternatives alike.
There's no need to panic. In response, Piermont has three timely reminders to investors:
1. Does your investment time horizon match your investments? We view equity investments, for example, as 15+ year investments. That’s right – if you’re not going to hold those positions for at least 15 years, you need to be prepared for potential principal losses (and potential gains, to be fair) between now and then. That’s not pessimism – that’s based on cold, hard historical statistics.
2. Almost all bonds offer a yield. Many stocks offer a yield (in the form of dividends). If you’re picking between the two based on the highest yield – you’re ignoring a huge piece of the picture: VOLATILITY. At the start of this past week, the S&P500 was offering a 2.15% dividend yield, while the 10-year Treasury bond was offering 2.14%. If you considered the potentially more favorable tax rate on stock dividends versus bonds, and opted for the stock yield, consider this: S&P500 down 3.9% from June 19-20th; 10-year Treasury down 2.1% over the same two days – both ugly, but the former is 86% uglier. It’s not just about potential return – it’s also about potential volatility. If you’re opting for stocks, make sure you’re buckled up for the potentially incremental volatility (compared to bonds).
3. The Fed is empowered to control inflation and maximize employment. Similarly, they’re NOT in the business of blowing up your 401(k) or eliminating your retirement income with 0.1% CD rates. Put differently, if the economy were having significant trouble growing, the Fed would likely have continued pumping money into the system via bond purchases or other means. When you take into account the fact that a strong(er) economic backdrop typically helps lift both stocks and bonds, this is GOOD news for most investment classes.
Putting it all together, it’s not all about return - it’s about risk-adjusted return. If your investments match your time horizon, these short-term market swoons should work to your advantage over time. Rebalancing your diversified portfolio is a key part of that equation, and we’ll address that in one of our next posts.