Written by: Benjamin Bimson CIMA® / CIO, BCJ Financial Group
If you feel a bit like things are unpredictable in this stock market, welcome to the club. Looking at the whipsawing headlines you might be left to wonder if you should be sighing a sigh of relief that perhaps the worst is over in the correction or fear something even more dramatic. Welcome to 2018.
I have been asked a few times if this is a dramatic change from the past and does it signal anything.
The answer is very unsatisfying: it means we are likely to continue to have volatility. Volatility is what can keep investors up at night worried about their financial security unless they have a comfort with their strategy. It is very nice for many people when markets go up nice and steadily with no significant drops. It is also unusual to have that. Coming off the longest period of low volatility ever observed in stock market returns, the pain of reality is much more striking!
In our promise to always remain candid with our clients: volatility is likely to persist throughout 2018. This is not merely due to unique geo-political risks, but also a tendency that the market must go through volatility cycles after long periods of low volatility as it reverts towards a more average volatility.
Good news? This doesn’t mean that we cannot make money during times of volatility. In fact, the year started with an indicator that 2018 would likely be volatile because of such as strong start after a very good 2017.
In looking at all years since 1950 which started out with a January where the market grew 5% or more, volatility was almost always present. I went data diving to discover from history what has happened in prior years and put together a table to identify monthly returns along with annual returns for years that have started out like 2018 has.
The numbers alone are very telling. The average returns for those years are staggeringly good but the volatility along the way increased as well. When we look at monthly returns, many times the worst is not reflected. 1987 and 1980 stand out as years which highlight the potential for big monthly drops.
Hidden in almost every year in the following chart are often at least one, and often more than one, major market correction. There is very little in terms of monthly patterns that predict when, but they are there, hidden in the data.
The comfort is that even though large declines have happened on a short-term basis, so far, each year has rewarded investors who held on through the year.
What can we learn? While what we have gone through this year is not unprecedented, it almost always can feel that way when we are living it. Which is exactly why being mentally prepared is imperative.
By having a well-defined strategy to help remove the emotions from investment decisions, we can prevent ourselves reacting in the heat of the moment. These types of market years can be challenging so it’s important to remain honest about what you can and cannot handle.
Securities offered through World Equity Group, Inc. Member FINRA/SIPC. Advisory Service offered through BCJ Capital Management. World Equity Group, Inc. and BCJ Capital Management are independently owned and operated. Investment advisory services are offered through BCJ Capital Management, an SEC registered investment adviser. BCJ Capital Management is a (SEC) registered investment adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. BCJ FG 18-39