​Volatility Is Any Long-Term Investor’s Best Friend

Ivan Illán  |

The huge global market run-up (both US and Non-US stocks) is now quickly giving up all its gains (see Chart). From November 1, 2017 through January 26, 2018, the S&P 500 was up 11.30%. The MSCI EAFE index (which includes all developed markets outside the US) was up 7.96%.These were clearly ridiculous market surges. If annualized, this would translate to a total return of nearly 50% for the US stock market!

To the best investors, such an annualized total return projection for the US stock market would seem extremely abnormal. We don’t get 50% per year returns unless we’re exiting the depths of a bear market – which is not the current state. No one should be surprised that markets globally are taking a breather, and resetting to zero after an abnormally brisk three-month upward sprint. Average annualized returns for US stocks over the past 5 years, during one of the most successful bull market runs in history, have averaged 14.54% (source: Morningstar).Seeing this kind of annual return in only three months would mean that something must revert to the mean.

Don’t be distracted by short-term volatility. It’s a buying opportunity, if you have the cash. Alternatively, it’s a rebalancing opportunity as portfolio holdings test their correlations to one another. Selling a little bit of the holdings that have held their value better to buy a little more of those that have lost more is a typical strategy. This assumes that the holdings themselves still maintain underlying fundamental strength.

The US and Global economies are in good shape. Various econometrics, like GDP, unemployment, wages, productivity, and earnings, are all in still in growth mode. Compound these positives with the recently passed US tax bill, foreign corporate profit repatriation and the potential for the passage of an infrastructure spending bill, mean that corporate earnings and the bull market haven’t finished their run yet.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer



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