You may have seen headlines recently highlighting a 450-point drop in the Dow Jones (the market). When numbers like that appear in bold headlines, they can sound alarming. However, it’s important to remember that market movements should always be viewed in context.

Today the Dow sits near 47,000, after achieving 50,000 not too long ago.  Ten years ago, when the Dow was closer to 17,000, a 450-point move represented a much larger percentage change. As markets grow over time, the point value of daily movements naturally increases, which means headlines that focus only on point drops can sometimes exaggerate the true impact.

When we step back and look at the data from the last 10 years, daily swings like this are actually quite common.

• The Dow has declined more than 1% on 251 trading days in those 10 years
• It has gained more than 1% on roughly 300 trading days in the same 10-year time frame.
• 13 of the 20 largest daily point moves in history have occurred during this same period.

Despite those frequent ups and downs, the overall trend has remained positive. Over the past decade, the Dow has averaged more than 10% annually.

That 10-year period included many significant events, including leadership under both Republican and Democratic administrations, geopolitical tensions, rising and falling interest rates, and even a global health pandemic that temporarily shut down large parts of the world economy. Markets experienced volatility along the way, but long-term investors who remained focused on their plan were rewarded.

This is an important reminder that short-term market movements are normal and often amplified by headlines designed to capture attention.  When geo-political events like this occur, and they have quite often, investors rush to estimate the effects of everything from oil prices, airline fares, employment, inflation and corporate earnings, which creates volatility in stock markets. However, the estimates can be very short sided or inaccurate, leading to big news headlines and causing great stress for investors.

The ultimate reality is that short-term fluctuations in prices caused by short-term geo-political events dissipate over time and long-term factors like corporate health, innovation, productivity and earnings take over again. With that in mind, this most recent event should not affect the AI innovation revolution, the datacenter build out, the relatively strong corporate balance sheets or the eventual interest rate decisions by the Federal reserve.

For many of you, a well-balanced portfolio can help navigate these periods. A traditional 60/40 portfolio—approximately 60% in stocks for long-term growth and 40% in bonds and/or cash for stability—has historically provided a balance between growth and risk management. While stocks can experience volatility in the short-term, bonds and cash investments often help provide stability and income.

Another way we try to help reduce risk for many clients is by employing multiple strategies.  First, for the past 18 months we have added gold to our portfolios as a hedge against inflation. Gold has shown itself to be an asset during this time that can increase in value and not fall as much during times of volatility.  Second, we have added investments that use hedge strategies to reduce volatility. Third, we reduced equity exposure by a small amount at the outset of the conflict. You might have noticed last year that our equity exposure was lower while the tariffs were causing markets to roll but increased equity throughout the summer and into the fall.  Lastly, and possibly most important to those of you taking income, we maintain all your income needs for many years in money market, short-term bonds or higher quality intermediate bonds.   

In other words, the goal is not to eliminate market volatility—that simply isn’t possible—but to structure portfolios to try to meet our return goals with as little volatility as possible. If you have been a client for a long time, you realize that we do not try to time the market but instead make small incremental changes over time. 

Markets will always move up and down. Headlines will always focus on the most dramatic numbers. But successful investing has historically come from maintaining a thoughtful strategy and focusing on seeing the forest through the trees. 

As always, if you have any questions about the markets or your investment plan, please feel free to reach out. We are always happy to talk.