Yesterday was a tough day to be in stocks

Copyright (c) 123RF Stock Photos

Copyright (c) 123RF Stock Photos

In case you didn’t notice, stocks tumbled yesterday, bringing the year-to-date loss for the S&P 500 to around 5.65%. On days like this you can learn some important lessons on investing. The first is to remember that you should have a balanced portfolio and understand how much your portfolio will move up and down under certain scenarios. A balanced portfolio means you own some stocks, some bonds, maybe some real estate, as well as other asset classes, etc. By owning different types of investments that are non-correlated, which means they move in opposite directions, you have a better chance of holding through rough markets like today. The second is that we never know when these tough days are going to come, so you have to prepare for them in advance. Lastly is that you should analyzing your risk tolerance and invest in the investments that will match the volatility your comfortable with.

Still no reason to make drastic changes to your portfolio

Even though you may be thinking this is really bad, lets look at a real life example of how a typical balanced portfolio has fared so far this year. I am going to use real live money examples rather than percentages. So to illustrate where we are at from the beginning of 2014 to today I will use the following example:

  Year to date return—> $100,000 has dropped to—>
S&P 500 -5.65% $94,350
Dow Jones Balanced Index -2.21% $97,790
  The above example shows that if you have a balanced portfolio you can potentially reduce the downside risk to your account and if things get much worse, then my suggestion is to think about being more tactical and reduce exposure to stocks as the markets warrant.

Current Market Update

Here are a few charts to give a better picture of the overall market and where we are at today. First is a long-term view (from 2000 – 2014) of the S&P 500, which is a stock index that we use to represent the US stock market. As you can see we broke out of 12 years of going no where in April of 2013 and moved above the dotted line. Most money managers, myself included, see a break out as this as a good healthy sign for the overall market. But that doesn’t mean we can’t drop 10%-20% even after a breakout. So we must be prudent and watch the signs that the market is telling us to make adjustments when if things deteriorate further. The decline of the stock market year to date still hasn’t even registered on this long-term chart. That is not to say it is not painful when your account goes down, what the chart is saying is that this decline is considered normal market action at this time, but warrants a careful eye if things continue downward. SPX-Monthly The second chart below is a shorter term daily chart of the S&P 500. As you can see this chart has turned down and has added red O’s which shows the stock market is in a decline. However, as I mentioned in my last update, my only concern was that the market was quite a distance from the blue long-term trend line and will at some point get pulled down. If we drop towards the second dotted line, this would represent approximately a 7% pullback. Which would be considered a normal pullback and nothing close to a crash. SPX   My final chart is a new one that most of you haven’t seen. This chart is an investment call AGG, which is a representation of the overall bond market. As I mentioned earlier in this post, if you have a balanced portfolio, you would be seeing smaller drawdowns than the overall stock market. The chart below shows what has been happening to the bond market as the stock market has been dropping. Since December at the same time the stock market has dropped approximately -5.50%, the bond market has risen just under +4.0%. This shows how a balanced portfolio can potentially smooth out returns during market volatility. AGG

Conclusion

Current market conditions are volatile and we could get a deeper correction, but at this time the market indicators are not flashing any warning signals of an out right crash. As I always say things could change and change fast, which is why being a tactical investor can allow you to adjust quickly as the situation warrants. If you like what you see here feel free to pass this on through the sharing icons below.  If you are not currently a client, and would like to know more about how to invest using tactical investment strategies – feel free to reach out to me directly through my contact form.  If you have general questions, just use the comment form a couple of inches below this post. Also, you don’t want to miss any critical updates as the markets can move quickly so don’t forget to sign up for my latest updates.

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