Like many of you, Don and I and our families had a wonderful time celebrating the Fourth of July holiday weekend. When I was growing up, the Fourth seemed mostly about barbeques, friends, hanging out at the pool, and fireworks. It was also always the end-of-season tournament for my little league team, after which I looked forward to our upcoming vacation.
Throughout the years, however, we’ve come to better appreciate what Independence Day really means. We have a measure of freedom in our nation few today and even fewer throughout recorded history have enjoyed. And that freedom came (and still comes) at a steep price. We have the freedom to speak our mind, the freedom of religion, the freedom to assemble, and the freedom to question our government. In addition, we have the freedom to choose our own leaders – from the local city council to the president of the United States.
Some of us are looking forward to the upcoming election and are excited about the prospect a woman may lead the greatest nation that has ever graced the face of the Earth. Others may be eager to cast their vote for a political newcomer, hoping to shake things up in Washington. Don and I am also realists and are painfully aware many folks aren’t very enthusiastic about the choices We the People have. It’s not always perfect, but if you really reflect on it, we, as a nation, govern ourselves. And this grand experiment in democracy has been exported around the world in many forms.
Democrat or Republican?
You may feel strongly about one candidate or the other when it comes to your politics, but when it comes to your portfolio, it doesn’t matter much which party wins the White House. Evidence shows a focus on which party wins the White House is unwarranted – at least from an investing standpoint.
Our goal, however, is to keep you focused on your financial goals and objectives. Emotionally based decisions rarely work out in your favor. Whether large or small, whether highly sophisticated or simply a novice, investors price stocks through their collective buy and sell decisions. When new information is disseminated in the marketplace, stocks may react either positively or negatively, depending on how the information is viewed.
Collective wisdom, market volatility, and how stocks are priced
There is an enormous amount of research concerning how stocks are priced. Whether investors are reviewing an individual stock or a broad measure of equities such as the S&P 500 Index, in reality the price is a gauge of market sentiment that takes into account the collective wisdom of all market participants. These participants include everyone from the small investor to sophisticated institutions that have created complex models to value stocks. Simply put, investors incorporate all publicly available information, collectively generating what they believe is a fair price for the stock or industry metric at that moment. As sentiment shifts, so does the price. These participants are all “putting their money where their collective mouths are,” so to speak.
Since information is so readily available and is so quickly distributed, analysts and academics like to say that markets are efficient. While we would argue in favor of market efficiency, we believe the collective wisdom of investors can sometimes misprice risk, especially when emotions come into play. Still, we strongly encourage you to avoid trying to time the market. No matter what an article you have seen that seems to have special insights into the future says, no one has a crystal ball that consistently calls the highs and lows.
That brings us to the ups and downs in the market we’ve recently experienced – what analysts call ‘volatility.’ In some respects, the declines of just over 10% in the late summer 2015 selloff and the early 2016 selloff really weren’t particularly significant. Market corrections in the broader context of a bull market will happen from time to time. Our goal is to manage and mitigate risk, but we can’t eliminate it.
What’s an investor to do?
Control what you can control – the investment plan – and be very careful about making a rash decision based on an emotional selloff or election result. Stocks took a beating in the wake of the Brexit vote but quickly recovered nearly all of their losses by the end of July.
We understand most investors don’t fully understand the impact of what happened in Europe in relation to their investments. Honestly, many analysts would concede there are unknowns. And, the same holds true for the quadrennial presidential election cycle. Nobody knows how the market will react.
We hope you’ve found this review to be educational and helpful. As we always emphasize, it is our job as financial advisors to assist you. Thank you very much for the trust and confidence you’ve placed in our firm.
DISCLOSURES: The information provided in this letter is for general informational purposes only and should not be considered an individualized recommendation of any particular security, strategy or investment product, and should not be construed as investment, legal, or tax advice. The Nalls Sherbakoff Group, LLC makes no warranties with regard to the information or results obtained by third parties and its use and disclaim any liability arising out of, or reliance on the information. These indexes reflect investments for a limited period of time and do not reflect performance in different economic or market cycles and are not intended to reflect the actual outcomes of any client of The Nalls Sherbakoff Group, LLC. Past performance does not guarantee future results.