Fiscal Bravery: Success in the Face of Volatility
Markets can get volatile. It’s happening right now. We are seeing a brand new set of rules being applied as five major tech giants make up about 50% of the S&P 500. Amazon, Apple, Facebook, Google, and Microsoft are currently dominating the S&P. Any notable change for any of these titans has ripple effects on the entire market and can influence all kinds of change and therefore, create volatility.
We also have more and more people entering the market than ever before and this increases the impact of individual emotions influenced by mob mentality. When pensions attempted to rebalance themselves in June, natural market fluctuations occurred. This was misunderstood by many as a reason to panic and sell. This snowball effect came from a lack of understanding and an emphasis being placed on emotion.
When investing, you are never going to be able to control the market and how it moves. What you can do is guide your ship through the waves and realize that when the currents are choppy, that means the winds are strong and they can push you further than sailing through safer-waters.
Note the chart below which indicates that the movement of share prices in the short term bear little-to-no resemblance to the long-term operations of a business. There is a steady increase in the earnings outlined on this chart, but the share price was very volatile. This volatility was created by factors outside of the underlying business.
*for illustrative purposes only
Company acquires a competitor for an undisclosed amount.
Insurance cancellation scandal widens and company sued for illegally denying coverage.
Company increases stock repurchase program to authorize future purchases.
CFO fired.
Company announces strong 2008 outlook. Its leading market position is expected to continue generating good growth and enhanced value.
U.S. health insurers “moving towards an oligopoly.”
Stock repurchase approved, but investors prefer increased dividend.
Macroeconomic fears spread about the European debt crisis and concerns over France’s AAA rating.
Supreme Court upholds Obamacare as constitutional.
Company announces plans to replace its CEO.
New CEO named.
Company acquired.
The Ramberran Wealth Group would like to emphasize that the play-it-safe approaches that worked in the past are not nearly as impactful or helpful as they once were due to the aforementioned changes. In 1995, to maintain an average annual return of 7.0% a portfolio needed to take on a standard deviation of risk of about 6.0%. This was easily done by building a portfolio consisting entirely of safe, conservative, investment-grade bonds. In the modern world, to generate that same rate of 7.0% return, a portfolio would have to incur a standard deviation of risk of 19.2%. That portfolio would only include bonds of the high-yield variety and those bonds would only make up about 10% of the portfolio, with Emerging Markets and International Developed Equity doing the heavy lifting and support coming from REITs, U.S. Small and Large Caps. That means that generating the same return almost 25 years later means increasing the risk of your portfolio by about 3.2x.
As a strong believer in investing with the best portfolios we can find, the Ramberran Wealth Group sees undeniable growth through periods of volatility, using portfolios that beat the MSCI World Index by 15% - 22% from 2008 until now (source). This kind of success proves that staying the course through market volatility yields much greater results. When the waters are choppy and you want to feel safe, do not alter your course and risk changing your destination. Let us take the wheel and make the bold decisions so that you can feel safe and secure in your cabin.
