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Investment Returns After Major Market Sell-Off

By: Ryan Johnson, AAMS® and Joseph Calhoun, CFP®

History, Repeat Yourself Already!

It is certainly not fun to watch investments fall but history tells us that they always will at some point. Nobody knows when, why, or how much – what we do know, though, is that they will eventually go higher, if history is any indication.

In an examination of historical short-term losses in the S&P 500 and its subsequent period returns, Michael Batnick, CFA (@michaelbatnick) shows that the further stocks fall, the greater annual returns you can expect going forward. For example, if you had a drawdown of 25-30%, your annualized average rate of return over the next 3, 10, and 20 year periods were 8.5%, 6.9%, and 9.6%, respectively.

This article caught my attention when he wrote it this past Monday, but it is even more revealing a mere 6 days later, as the Dow Jones Industrial Average fell an additional 17.3% in a week, and off -35% from its February 12 peak.

If you can invest new money for long term goals, you will look back on this opportunity and wish you’d done something or be happy that you did something – it’s up to you (with people like us to help you do it!)

This may seem less reassuring for those who are already invested; but, this may be a good opportunity to rebalance your portfolio to your target asset allocation. For example, if you previously considered your risk tolerance and your timeline for investing money, and you determined a 75% equity (“stocks”) and 25% fixed income portfolio was suitable for you, your portfolio may now be closer to a 65% equity and 35% fixed income portfolio just due to the recent market volatility.  A rebalance would sell some fixed income positions and buy equity positions in order to bring your allocation into your previously defined balance, increasing your equity exposure appropriately while their prices are low.

What Michael Batnick illustrates shows us that staying in the equity markets during the selloff is going to improve your long-term returns, and appropriate investment of cash can enhance portfolio returns regardless of timing it perfectly at the hypothetical “bottom”.  If you would like to discuss your plan and investment strategy, Symphonic Financial Advisors are here to help.

Stay safe!

Joe Calhoun, CFP®

Joe Calhoun is the Director of Financial Planning for Symphonic Financial Advisors, guiding our Financial Advisors in delivering custom-tailored planning services for clients.

DISCLOSURES: The information presented does not involve the rendering of personalized investment, financial, legal or tax advice. This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell, any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts and forward-looking statements presented herein are valid as on the date of this document and are subject to change. Past performance is no guarantee of future performance. As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money.