A good way to describe stock and bond market returns during the first six months of 2017 is "placid." As in, low volatility with a gradual upward trend. That is a beautiful combination. But will it last?
The other news was that international stock markets finally rewarded investors, and with double-digit returns.
According to the Wall Street Journal, stock market volatility in the second quarter was the lowest in more than 50 years! There were no stock market declines of 5% or more during the last six months, despite political difficulties in the US, tightening monetary policy and the length of the current bull market.
Positive news that may be driving the markets higher includes low inflation, earnings growth and low interest rates.
Volatility is the frequency and magnitude of changes in the price of a security. Stocks and stock funds are usually much more volatile than most bonds and bond funds. Volatility is one form of investment risk.
Low volatility looks like this, the first six months of 2017.
During the first six months of 2017, there was never a time when the value of the stock fund investment was below the bond fund investment. But volatility was still slightly more for the stock fund.
One of my clients said that she "wishes her EKG looked that good."
Higher volatility looks like returns in 2016.
In 2016, higher stock market volatility caused stocks to underperform bonds for various periods of time. However, at the end of the year, stocks had significantly outperformed.
Higher volatility is a risk that investors need to be prepared for. Stock market volatility is normally higher than in 2017 and often higher than in 2016. And US stock markets are overdue for declines of 5%, 10% and 20%.
Historically, stock market declines were a natural part of investing. Declines varied in intensity and frequency, but they were common events. What is unusual at this point is the lack of major declines.
Fortunately for stock investors, the markets always recovered from declines. Although past results don't guarantee future results, remembering that downturns were temporary in the past may help assuage your fears when stock markets do decline.
My strategy for investment clients is to keep them invested in their agreed allocation between stock and bond funds until declines occur. I will then look for opportunities to sell bond funds and buy stock funds to rebalance back to that stock/bond allocation.
Buying stock funds after a major stock market decline, when prices are low, is a strategy requiring discipline to buy when others are selling and the patience to wait for recoveries.
What is your strategy?
This is for educational purposes only. To learn more about the topics mentioned and if they are suitable for you, consult an appropriate professional. Tax laws can change at any time.
Any information provided in this presentation has been prepared from sources believed to be reliable, but is not guaranteed and is not a complete summary or statement of all available data necessary for making an investment decision. Any information provided is for information purposes only and does not constitute a recommendation.
Keep in mind that:
- Past performance is no guarantee of future performance.
- Investments involve the risk of loss of principal and earnings.
- ETFs, mutual funds, money market funds, etc. are not guaranteed by the US Government, the FDIC, a bank or anyone else.
- "Average annual return" evens out variations in the actual year-to-year returns.
- ETFs, mutual funds and individual stocks and bonds fluctuate in value and there will always be times when they lose value.
- None of the information provided is necessarily relevant to anyone's personal situation. Circumstances differ among individuals and they should not assume that these generalizations or information apply to them.
- Investments mentioned may not be suitable for all investors.