A Word From Bob – May 2016 :: Wamhoff Financial & Accounting


A Word From Bob – May 2016

Greetings! Attempting to quantify or predict the future is a fool’s errand, but when applied to financial markets it becomes a truly humbling experience. Financial markets will consistently keep the greatest economic minds in check. Instead of writing about what is going to happen, we prefer to prepare our clients and their financial plans for uncertain market conditions that can withstand market volatility.

The table shown below illustrates the April monthly returns, as well as the year-to-date returns through the end of April for the major U.S. stock market indices:

commentray-april2016-table

Back on February 11th, when the S&P 500 Index was trading at its lowest point in 2016, our clients started to panic. Trying to convince our clients on that day in February that stocks would rebound dramatically by the end of April would have likely triggered audible laughter.

The scenario which they would have laughed at in February, actually came to fruition by the end of April. The emotional response that becomes palpable during market corrections is usually the wrong response for long-term investors. Had we not managed the emotional response of our clients, we would have had several households reallocate their investment portfolios at a horrible point-in-time. These emotion-driven, poorly-timed sale orders would have crystalized near double-digit losses as markets moved higher despite our clients’ expectations.

Ultimately, focusing our efforts on our clients’ unique objectives with an eye toward their long-term risk tolerance is the secret to success in my experience. We certainly cannot control investment returns across multiple asset classes, but we can control how we invest our clients’ investable assets to align with their risk tolerance and objectives.

History suggests that since the S&P 500 Index was created in March of 1957, the stock market is less likely to fall over longer periods of time. On the daily time frame, 47% of the time stocks move lower. However, the probability that stocks will finish an entire year lower is around 28%. As Richard Thaler, renowned behavioral economist stated during the Great Recession, “Inhale, exhale. Repeat. Then watch ESPN.” If only it were that easy.

In closing, we have our annual golf tournament at Bogey Hills coming up in June. For information to participate or to help sponsor the event, please do not hesitate to contact our office. With tax season behind us and the summer coming quickly, I would remind all of you to stay healthy, wealthy, and wise, and certainly . . . stay tuned.

Bob

https://finance.yahoo.com/q/hps=^GSPC&a=11&b=31&c=2015&d=03&e=30&f=2016&g=d&z=66&y=0
https://finance.yahoo.com/q/hpa=11&b=31&c=2015&d=03&e=30&f=2016&g=d&s=^DJI&ql=1
https://finance.yahoo.com/q/hpa=11&b=31&c=2015&d=03&e=30&f=2016&g=d&s=^RUT%2C+&ql=1
http://www.nytimes.com/2015/08/25/upshot/how-emotion-hurts-stock-returns.html?_r=0