Wealth Management Blog

Posts tagged Bonds

The Death of Equities…Again (and Again and Again)

By JJ Burns

August 8, 2014

In early August, the stock market has looked a bit rocky. The major averages fell in July and have begun this month by moving lower again. Not a lot, but enough to get your attention. The fact is the Dow Jones Industrials Average, the Standard & Poor's 500 Index and the Nasdaq Composite haven't fallen together for two straight months since the summer of 2011.

There is talk that Russia's escalating tensions with the Ukraine and the battle between Israel and Hamas in Gaza will push oil, gasoline and winter heating costs higher. There's also been increased chatter about when the Federal Reserve may start to raise interest rates due to a seemingly improving U.S. economy.

Does This Mean The Bull Market Is Over and You Should Sell?

Smart, disciplined thinking and planning can get you through this unsettled market.  What we know, and research confirms, is that investors who make buy and sell decisions based on emotions are regularly wrong.

According to research from the Investment Company Institute (http://www.ici.org) and Fidelity Investments, starting in the late 1990s, too many individual investors bought stocks when prices were rapidly rising and then lost a bundle when the market crashed in 2000-2002; this process was basically repeated, but for different reasons, again in 2008-2009.  They then shied away from stocks when panic selling was clearly evident, especially in early 2009, and missed one of the great rallies of all time. The S&P 500, even after a recent pullback, is up 180% since the March 2009 bottom.

To look at the data below showing investors constantly selling equity funds and buying into bond funds, is really shocking.  Many investors who need stocks in their portfolios have missed out on a great rebound, only to start to put money to work again at a new market inflection.  In fact, the smart play is to think like a contrarian and trim back on equities when the market is booming and start to buy when it's clear that a correction, or, in the worst case, panic selling has set in.

Historical Pattern of Flows Interrupted

When markets have more volatility the graph clearly shows how the flow of funds enter and exit stock and bond investments. The behavior of most investors shows a herd mentality that reflects a lack of discipline in sticking to a well-thought-out plan representative of their goals.

Fundamentally, this data tells us that great investors are:

  1. Contrarian
  2. Disciplined
  3. Long term in focus
  4. Seek value, not trading, to grow wealth
  5. Don't panic or move too far from strategic targets

Be a Natural Contrarian

It’s important to understand the consequences of making emotional decisions and not maintaining a disciplined plan.  When fear or frustration set in, emotions tend to guide decisions.  This is how most investors wind up taking on more portfolio risk than they may need.

At JJ Burns we encourage you to revisit what you want your future to be and make certain your plan will help you achieve that goal.  The fundamental core of successful financial planning is to always keep your  goals in mind and allocate your investments to the best level of expected return and risk that's right for you.  We're here to guide you with a customized plan that should be regularly reviewed when "cooler heads" prevail in irrationally exuberant or depressed markets.